Published on
July 12, 2025
Private Company Valuations: Adjusting for Public Comps
Valuing private companies requires careful adjustments to public comparables for key differences in liquidity, size, and control.
Valuing private companies is tricky because they lack the transparency and market data of public companies. Analysts often use public comparables (public comps) to estimate private company values but must adjust for key differences like liquidity, size, and ownership structure to avoid inaccurate results.
Key Points:
- Public Comps Basics: Public comps are publicly traded companies with similar industry, size, and business models. Analysts use valuation metrics like EV/Revenue or EV/EBITDA to estimate private company worth.
- Adjustments Needed: Private companies face illiquidity (Discount for Lack of Marketability or DLOM), smaller scale (size premiums), and differences in control (control premiums or minority discounts).
- Why It Matters: Founders, executives, and investors use these valuations for funding, scaling, or exit planning. Adjusted public comps provide realistic benchmarks for negotiations and strategic decisions.
- Challenges: Limited data, accounting differences, and market volatility make this process complex. Normalizing financials and selecting the right comparables are crucial.
Using public comps effectively requires careful adjustments and expertise. Private company valuations benefit from professional guidance to ensure accuracy, particularly during funding rounds or acquisitions.
How to Select and Benchmark Public Comparables
When it comes to benchmarking public companies, precision is everything. The goal is to find publicly traded firms that closely resemble your private company in key characteristics. This careful selection process is vital because it lays the groundwork for making accurate adjustments, which we'll explore in later sections.
Criteria for Selecting Public Comparables
The first step in finding the right public comparables is to focus on industry classification. Look for companies operating in the same sub-industry, or at least the broader industry. For instance, if you're valuing a private SaaS company, prioritize publicly traded software companies with subscription-based models. Traditional software firms that rely on one-time license sales won't provide a meaningful comparison.
Equally important is aligning business models. Even within the same industry, companies can operate under vastly different frameworks. A SaaS company with recurring revenue streams should not be compared to a traditional software company. Their revenue patterns, customer acquisition costs, and growth paths differ too much to draw reliable parallels.
Next, consider size metrics like revenue, assets, or employee count. Also, take into account geographic focus, as regional market dynamics and regulations can significantly impact valuation. For example, comparing a private company with $50 million in revenue to a public company generating $5 billion annually would be misleading due to their vastly different operational challenges and market presence.
Growth rate and profitability are also critical. High-growth, low-margin companies operate under different investor expectations than mature, profitable firms. Margins, in particular, reveal a lot about a company's ability to reinvest in growth or distribute dividends.
Lastly, examine capital structure. A company's debt load can heavily influence its valuation multiples. For example, a highly leveraged company will trade differently than a debt-free peer, even if their operational performance is otherwise similar.
Making Data Consistent Across Companies
Once you've identified potential comparables, the next step is to align their financial data for accurate comparisons. This involves normalizing financials by removing non-recurring items.
One major challenge is addressing discrepancies caused by differing accounting standards. Public companies follow SEC guidelines, while private firms often have more flexibility in their reporting. To ensure consistency, you may need to adjust for differences in revenue recognition, depreciation methods, and expense classifications.
Another factor to standardize is the treatment of stock-based compensation. Some companies include it in their financials, while others exclude it. Additionally, for businesses with seasonal patterns, using trailing twelve-month (TTM) figures can provide a more reliable view than quarterly data.
How to Avoid Mismatched Comparables
Choosing the wrong comparables can lead to flawed valuations. One common mistake is comparing companies with different risk profiles. For instance, mature, dividend-paying companies shouldn't be compared to high-growth startups, even if they operate in the same industry. Their investor bases and market expectations are worlds apart.
Another misstep is overlooking operating environment differences. Companies facing distinct regulatory challenges or competitive pressures aren't reliable benchmarks. For example, a fintech company in a heavily regulated market shouldn't be compared to one in a less regulated environment.
Scale disparities are another red flag. A company with a national presence will have different cost structures and competitive advantages than a regional player. Economies of scale, supplier relationships, and brand recognition all come into play.
Finally, don't ignore lifecycle stage differences. A company in rapid expansion will have different margin profiles and capital needs than one in a mature or maintenance phase. These differences directly impact valuation metrics and investor expectations.
To avoid these pitfalls, start by researching the company being valued on platforms like Bloomberg or CapitalIQ. Use these tools to gather detailed descriptions and industry classifications. Then, systematically evaluate potential comparables against your criteria, eliminating those that don't align.
This process should be iterative. Begin with a broad pool of potential comparables and narrow it down step by step. By focusing on a smaller, highly relevant group, you ensure that your valuation reflects realistic market expectations for companies with similar characteristics and risk profiles. Once you've refined your list, you're ready to tackle the adjustments for private versus public differences.
Key Adjustments for Private vs Public Company Differences
When it comes to valuing private companies, the challenge lies in accounting for the fundamental differences between private and public firms. Private companies operate under distinct conditions, and without proper adjustments, their valuation can be overstated. This can lead to unrealistic expectations in fundraising, mergers and acquisitions, or strategic planning.
Here’s a closer look at the key adjustments for marketability, size, and control that help bridge these differences.
Discount for Lack of Marketability (DLOM)
One of the biggest adjustments revolves around liquidity. Public company shares can be sold quickly during market hours, while private company shares often take months - or even years - to find buyers. This lack of liquidity significantly reduces the value of private companies.
Understanding the DLOM Range:
Research indicates that DLOM typically falls between 30% and 50%. Pre-IPO studies suggest a range of 40–60%, while restricted stock studies show a narrower range of 20–35%. In extreme cases, the discount can climb as high as 90%.
Calculating DLOM in Practice:
For instance, when valuing a SaaS company, analysts applied a 32% DLOM, reducing the share price from $10 to $6.80.
Methods for Determining DLOM:
There are three common approaches for calculating this discount:
- Restricted Stock Method: Looks at transactions involving restricted shares of publicly traded companies.
- Option Pricing Method: Uses financial models to assess the value of liquidity options available to public shareholders.
- IPO Method: Compares pre-IPO transaction prices with those from subsequent public offerings.
Additionally, company-specific factors can influence DLOM. Frameworks like the Mandelbaum Factors consider elements such as public offering costs, stock transfer restrictions, redemption policies, holding periods, management quality, and dividend policies, among others.
Size Premium Adjustments
Smaller companies inherently carry higher risks compared to their larger counterparts, and these risks must be reflected in valuation adjustments. The size premium represents the additional return investors expect when taking on the higher risk of smaller enterprises.
Why Size Matters:
Smaller companies often have fewer resources, less liquidity, and higher risk exposure, which justifies a size premium adjustment in their valuation.
Quantifying the Size Premium:
Historical data shows that smaller companies tend to deliver higher returns. For example, as of December 31, 2018, the smallest 5% of companies by market capitalization had a size premium of 8.25%, while the next smallest 5% had a premium of 3.71%. This highlights a 4.54% difference in risk-adjusted returns.
Applying Size Adjustments:
The impact of size premiums is most noticeable among the smallest public companies, and similar adjustments are often necessary for private firms. When applying these premiums, analysts typically isolate the portion of excess return tied specifically to the company’s size, excluding other risk factors like beta.
Control Premiums and Discounts
The level of control attached to an ownership stake plays a significant role in valuation. Public company share prices generally reflect minority interest values, while private company transactions often involve control positions. This difference requires careful adjustment based on the ownership percentage being valued.
Control vs. Minority Positions:
Valuing a majority stake in a private company often involves adding a control premium to account for the added value of decision-making authority. Majority shareholders can steer the company’s strategic direction, approve key transactions, appoint management, and set dividend policies. On the other hand, when valuing a minority stake, a discount for lack of control (DLOC) is applied to reflect the limited influence of minority shareholders.
Factors Affecting Control Adjustments:
Several factors come into play when determining control premiums or discounts, including:
- Ownership Percentage: A 51% stake provides significantly more control than a 30% stake.
- Shareholder Agreements: These can grant minority shareholders special rights, such as veto powers, or reinforce majority control.
- Governance and Industry Dynamics: Companies with strong independent boards or those in regulated industries may have smaller control premiums, as external oversight can limit the value of decision-making authority.
Step-by-Step Guide to Applying Adjustments
This guide offers a practical approach to refining valuations for private companies, building on the framework established by public comparables.
Gather and Normalize Financial Data
Accurate valuations begin with clean, consistent financial data. Start by collecting several years of financial statements for both the private company you’re evaluating and the comparable public companies. These should include income statements, balance sheets, and cash flow statements. While public companies typically disclose this information in SEC filings, private companies may rely on audited or reviewed financial statements.
Next, normalize the data to reflect sustainable operating cash flows. Adjust owner compensation to align with market standards. Remove or modify nonrecurring items - like losses from unusual events (e.g., a plant fire) or one-time restructuring expenses - since these don’t represent regular operations. Look closely at related-party transactions; for example, income from noncore investments or rent paid at non-market rates should be adjusted to ensure fair comparisons. Additionally, determine whether significant capital expenditures are one-off events or part of routine maintenance, and normalize them accordingly.
Once the financials are cleaned up, you’re ready to calculate the valuation multiples.
Calculate Valuation Multiples
With normalized financial data prepared, calculate valuation multiples that best match the company’s financial profile and industry. Enterprise value multiples, such as EV/EBITDA, are particularly popular because they account for the company’s full capital structure. To compute these, take each public comparable’s enterprise value (market capitalization plus net debt) and divide it by its normalized EBITDA.
For private companies, EBITDA multiples are often the go-to metric, though the appropriate range depends on factors like the industry, growth potential, and risk profile. For instance, a tech company with high margins and rapid growth may warrant a higher multiple than a traditional manufacturing business. Revenue multiples can also complement EBITDA multiples, especially for high-growth businesses with limited profitability. Instead of relying on a single figure, use a range of multiples to capture variations in the market.
From here, you’ll adjust these multiples to account for the unique characteristics of private companies.
Apply Adjustments for Marketability, Size, and Control
Once you’ve established baseline multiples, fine-tune them to reflect differences between public and private companies, focusing on factors like marketability, size, and control.
Control adjustments depend on the ownership stake being valued. A controlling interest typically commands a premium due to decision-making authority, while a minority interest often requires a discount for its lack of control.
Start with the baseline EBITDA multiple derived from public comparables. Then, apply adjustments for marketability (considering the ease of selling the private company’s shares), size differences, and control factors. These adjustments may significantly alter the initial baseline multiple. Be sure to document the reasoning behind each adjustment, referencing market data, company-specific details, and industry benchmarks. Clear documentation is crucial for presenting your findings to stakeholders or during due diligence processes.
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Challenges and Limitations of Using Public Comps
Public comparables (public comps) offer a useful starting point for valuing private companies, but they come with their fair share of challenges. Recognizing these limitations can help you make more informed decisions and minimize potential errors.
Data Availability and Reliability Issues
Public companies operate under strict regulatory oversight, providing detailed financial disclosures like quarterly earnings and annual 10-K filings. This transparency is a double-edged sword when applying their metrics to private companies. The liquidity of public companies contrasts sharply with private firms, which often experience fewer mergers and acquisitions, creating a gap in data availability.
The quality and consistency of financial data also differ significantly. While public companies follow stringent SEC standards, private companies are not held to the same requirements. As a result, private financial statements often lack the depth needed for accurate comparisons.
Accounting standards add another layer of complexity. For example, U.S. GAAP operates as a rules-based system, while IFRS is principles-based and used in over 144 countries. These differences can lead to varying approaches to inventory valuation, asset presentation, and revaluation practices. For instance:
- U.S. GAAP lists assets in order of decreasing liquidity, while IFRS does the opposite.
- LIFO (Last In, First Out) is allowed under U.S. GAAP but prohibited under IFRS.
To navigate these challenges, focus on median figures instead of averages to reduce the impact of outliers. Additionally, normalize private company financials to align with public accounting standards, particularly in areas like inventory and asset valuation. These adjustments are crucial for improving the accuracy of valuation multiples and avoiding common pitfalls.
How to Avoid Common Mistakes
One frequent mistake is applying valuation multiples without accounting for company-specific factors like growth, profitability, or market position. A multiple that works for one company may not suit another, even in the same industry. Tailoring the multiple to reflect these differences is essential.
Market sentiment can heavily sway public company valuations, making them more volatile than private company valuations, which rely more on fundamental analysis. Recent high-profile transactions highlight how quickly multiples can shift, emphasizing the need to consider multiple timeframes and market cycles when selecting comparable data.
Another common oversight is neglecting the discount for lack of marketability (DLOM), typically ranging from 20% to 30% for private companies due to their lower liquidity. Similarly, if your public comps include much larger firms, apply a size premium to account for differences in scale, market access, and resources.
To strengthen your analysis, consider supplementing public comps with other valuation methods, like Discounted Cash Flow (DCF) analysis. This provides a broader perspective on a company's value. When these complexities arise, seeking professional advice can make a significant difference.
When to Seek Professional Advisory Services
Certain valuation scenarios demand specialized expertise, particularly when dealing with cross-border transactions, unique accounting methods, or volatile market conditions.
Professional advisors are especially valuable when addressing differences in accounting standards, navigating complex ownership structures, or preparing valuations for legal or regulatory purposes. Normalizing private company financials often involves subjective judgment, where experienced industry professionals can provide critical insights.
Phoenix Strategy Group, for example, offers financial and strategic advisory services tailored to growth-stage companies. Their expertise in bookkeeping, fractional CFO services, and M&A support helps businesses tackle the challenges of private company valuations, especially during funding rounds or exit planning.
When dealing with international comparables, intricate capital structures, or high-stakes decisions like mergers or tax planning, professional guidance can help you avoid costly mistakes. The investment in expert advice is often far outweighed by the risks of getting valuations wrong, ensuring your adjustments to public comps accurately reflect the unique financial landscape of a private company.
Conclusion and Key Takeaways
Valuing private companies using public comparables is no simple task. It requires blending market data with thoughtful adjustments to address key differences. This process involves selecting the right peer companies, normalizing financial data, and making targeted adjustments for factors like marketability, size, and control.
Adjustments such as the Discount for Lack of Marketability (DLOM), size premiums, and control modifications are essential to account for differences in liquidity, scale, and ownership. These steps ensure valuations are both accurate and defensible.
However, using public comparables comes with its own set of challenges. Limited data availability and market volatility can skew valuation multiples, making the process even more complex.
"Private companies are usually harder to value than public companies, because they have less available and reliable data, and fewer comparable companies. Therefore, private company valuation models often rely on more assumptions, projections, and adjustments."
– Ed Mysogland, Managing Partner at IBA
Private companies often derive significant value from intangible assets like brand reputation, intellectual property, and customer relationships - factors that are difficult to measure with standard metrics. These complexities call for more than just routine adjustments; they demand the expertise of seasoned professionals.
For finance professionals, mastering private company valuation methods is increasingly important, especially in fields like venture capital, private equity, and corporate finance. The subjective nature of these adjustments means that experience and judgment play a critical role in achieving accurate valuations.
For growth-stage companies preparing for funding rounds or exit strategies, the stakes are particularly high. Professional guidance is essential in such scenarios. Firms like Phoenix Strategy Group specialize in fractional CFO services and M&A support, offering the expertise needed to navigate these challenges. Their ability to tailor adjustments to reflect the unique financial realities of private companies can make all the difference.
FAQs
How is the discount for lack of marketability (DLOM) calculated when valuing private companies?
The discount for lack of marketability (DLOM) helps assess how the difficulty of selling private company shares affects their value. Analysts often rely on tools like the option pricing model, which calculates the cost of illiquidity, and findings from restricted stock studies, which compare the prices of private shares to their public counterparts.
Beyond these methods, analysts also consider company-specific factors like size, industry, and overall liquidity. These details allow for a more precise adjustment of the discount, ensuring the valuation captures the unique challenges of selling private shares in the open market.
What’s the difference between control premiums and minority discounts, and how do they influence private company valuations?
Control premiums are the additional amount investors are willing to pay to gain control over a company. This extra value reflects the advantages of having decision-making authority and the ability to influence the company’s strategic direction. On the flip side, minority discounts reduce the valuation of a minority stake because such stakes lack control and often face limited marketability.
Both of these concepts are key when valuing private companies. A control premium tends to raise the valuation for majority stakes, while a minority discount lowers it for smaller, non-controlling interests. Grasping these adjustments is critical for accurate valuations, structuring deals, and effective financial planning.
Why is it important to adjust financial data when valuing private companies using public comparables?
Adjusting financial data is a crucial step when valuing private companies using public comparables. Why? Because private and public companies often follow different accounting practices, which can lead to mismatches in how they report revenue, categorize expenses, or present financial results. If these differences aren’t addressed, the valuation process can become skewed, leading to unreliable outcomes.
Here are some common adjustments made to ensure consistency:
- Aligning revenue recognition: Private companies may record revenue differently than public ones, so aligning these methods is key.
- Normalizing EBITDA: This involves removing non-recurring or one-off expenses to reflect the company’s true operational performance.
- Accounting for standards differences: For instance, reconciling discrepancies between U.S. GAAP and IFRS standards.
- Standardizing fiscal periods and currency formats: Ensuring financial data is consistent across all companies being compared.
These adjustments ensure a fair, apples-to-apples comparison, giving investors and analysts the clarity they need for accurate valuations in the U.S. market.
