To evaluate a private company’s valuation, first pin down what is being valued, for what purpose, and as of what date. Then examine the evidence behind its income, market, and asset-based value indications, test the assumptions, and understand why the methods differ. A quoted multiple or a polished spreadsheet is not, by itself, proof that a valuation is reasonable.
Start by defining what the valuation is meant to answer
A valuation is an opinion tied to a specific assignment, not a timeless price tag. Before reviewing a number, identify:
- The subject: the whole operating business, a controlling stake, or a minority ownership interest. These are not interchangeable.
- The purpose: for example, a potential sale, financing, tax filing, financial reporting, or a dispute.
- The valuation date: the evidence and market conditions should relate to the date the opinion covers.
- The basis and premise of value: the standard being applied and the assumptions about how the business or interest is valued. Requirements can differ by purpose and jurisdiction.
Do not assume that a figure described simply as “market value” answers every tax, legal, financing, or reporting question. For a formal matter, verify the applicable professional and jurisdictional requirements. The IRS Business Valuation Guidelines discuss valuation methods and the judgment involved in selecting them; they are IRS guidance, not a universal standard for every jurisdiction or assignment.
Compare the three valuation approaches
Income, market, and asset-based approaches look at different evidence. They are not a fixed ranking, and more than one may be useful. CFA Institute and IRS guidance describe these broad approaches; the right selection depends on the business, available evidence, and purpose of the valuation (CFA Institute; IRS).
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| Approach | Main evidence | Judgment to examine | Useful checks |
|---|---|---|---|
| Income | Forecast or maintainable economic benefits, commonly cash flows | Forecast credibility, the discount or capitalization rate, and terminal assumptions | Test sensitivities; make sure the rate matches the cash-flow stream and its risk |
| Market | Multiples from publicly traded businesses or transactions involving other businesses | How similar the peers are, the financial measure used, timing, and differences in rights or marketability | Explain peer selection and adjustments rather than transferring a multiple uncritically |
| Asset-based | Underlying assets and liabilities | Relevant values for assets and liabilities, and how the operating business is treated | Where applicable, compare the indication with earnings and market evidence |
Income: examine the forecast and the rate together
A discounted cash flow (DCF) estimates future cash flows and discounts them to present value. Its result depends on the cash-flow definition, forecast period, discount rate, and terminal assumptions. A capitalization method may fit a stable, maintainable earnings stream, but it also depends on what earnings are expected to continue and how risk is reflected. The IRS guidance discusses income methods and related valuation considerations (IRS Business Valuation Guidelines).
Read a DCF as a model of assumptions, not as an objective answer simply because it produces a precise figure. Ask how the business supports its forecasts and what happens when important assumptions change. Private-company discount rates may account for factors such as company size and limited access to public markets. CFA Institute describes expanded CAPM and build-up approaches as methods used to address private-company valuation issues (CFA Institute).
Market: test whether the comparisons really fit
A comparable-company or transaction multiple is informative only to the extent that the comparison is relevant. Check the businesses’ models, customers, growth, risks, financial measures, timing, and market conditions. A multiple from a public company or a different transaction is not automatically transferable to a private business; differences need to be identified and explained.
The Financial Conduct Authority (FCA) says firms may use multiple comparable sets or a small number of directly relevant assets, and that changes in the similarity of comparables can prompt revaluation. Those are observations from the FCA’s review of firms managing private assets, not a prescription that every valuation must follow one process (FCA review).
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Asset-based: understand what is included
This approach focuses on assets and liabilities, with adjustments where relevant to reflect their values. It can be important when asset value is central to the question. For an operating business, however, an asset-based indication should not automatically replace evidence about earnings or comparable businesses. IRS and CFA Institute guidance recognize the asset-based approach alongside income and market methods (IRS; CFA Institute).
Work through the valuation in a practical sequence
- Write down the assignment. Record the valuation date, business or ownership interest, purpose, jurisdiction, and required basis and premise of value. Confirm formal requirements if the figure will be used for a legal, tax, financing, or reporting purpose.
- Understand the business and its evidence. Review how it makes money, its industry and competitive position, customer concentration, dependence on key managers, assets, liabilities, debt, and material recent events. Ask what records support the information being used.
- Normalize reported results. Identify maintainable earnings or cash flow and document material adjustments to reported results. Check that the benefit measure used for the business is consistent with the multiple or discount or capitalization rate applied. The IRS discusses the importance of valuation methods and relevant financial information in its Business Valuation Guidelines.
- Build an income indication. For a DCF, make the cash-flow definition, forecast period, discount rate, terminal assumptions, and sensitivity to changes visible. Consider whether the forecast follows from operating history and current conditions.
- Build a market indication. Explain why the selected companies or transactions are relevant, how their financial measures compare, and what adjustments were made for differences.
- Assess assets, liabilities, and the equity bridge. Identify material cash, debt, non-operating assets, and liabilities. If the starting point is operating-business (enterprise) value, explain how the adjustments lead to the value attributable to equity holders; do not treat enterprise value and equity value as the same figure.
- Reconcile the indications. Explain why each method deserves its weight based on the reliability of forecasts, peer evidence, and asset information. If the indications diverge, investigate which assumptions or evidence account for the spread rather than mechanically averaging the results.
- Address the specific ownership interest. Consider control, lack of control, marketability, and transfer restrictions only where relevant to the interest being valued, with a reason tied to its rights and circumstances. CFA Institute and IRS materials discuss these considerations; they do not establish a standard adjustment percentage for every company or stake (CFA Institute; IRS).
- Present a reasoned range when the evidence supports one. Show which assumptions move the result and how sensitive the conclusion is to them. The cited guidance does not establish one universal multiple, discount rate, or ownership-interest adjustment for all private companies.
Look closely at assumptions that are hard to observe
Private-company valuations can rely on Level 3 inputs: unobservable inputs used when there is little or no market activity. The FCA’s review describes private-asset firms generally using methods with Level 3 inputs under the IFRS 13 and ASC 820 fair-value hierarchies. That is a description of the firms covered by the review, not a claim that every company uses the same process (FCA review). AASB 13 also addresses fair-value techniques and the observability of inputs (Australian Accounting Standards Board).
The FCA found that many firms it reviewed lacked defined processes or a consistent approach for ad hoc revaluations after market or asset-specific events. It described practices including updating forecasts and discount-rate components, using comparable sets, and checking work with external valuation providers. For a reader assessing a valuation, the practical question is whether material new evidence was considered and the assumptions were revisited—not whether a particular checklist was followed.
- Forecasts do not have clear support in operating history or current market conditions.
- The company’s earnings definition differs from the one used for comparables.
- Peers appear to have been selected for convenience rather than business similarity.
- The discount rate does not match the cash-flow stream or the risks assumed in the forecast.
- Terminal growth or capitalization assumptions are asserted without a clear rationale.
- Debt, cash, non-operating assets, or liabilities are missing from the bridge to equity value.
- An ownership adjustment is applied without identifying the interest’s rights or restrictions.
- A material company-specific or market event has occurred, but the valuation assumptions have not been reconsidered.
What a reasonable valuation should make clear
A useful valuation should let a reader trace the conclusion back to its assignment, evidence, assumptions, and method choices. The IRS states: “Professional judgment should be used to select the approach(es) ultimately used and the method(s) within such approach(es) that best indicate the value of the business interest.” (IRS Business Valuation Guidelines.)
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For an owner or investor, the key test is not whether one number looks precise. It is whether the work explains what that number means, why its evidence fits the subject, how uncertain assumptions affect it, and how the conclusion follows from the selected methods.
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