Setting a Price for Private Companies

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Placing a price or value on a privately-held company is more difficult than valuing publicly company stock due to a limited market, financial and company information. There is no real time market price quoted for private companies, so we must turn to other approaches.

Setting a price on a private company takes thorough investigation and analysis. Most privately-held companies do not have audited financial statements or other standard reporting requirements. Due to this, owners who are looking to establish and defend the value their privately-held businesses should gather and maintain information on the state of their business, including financial, legal, market, operational, customer, vendor, product, intellectual property and personnel information.

A company with organized documentation reduces the amount of time spent by buyers in due diligence and increases the likelihood of a sale. Prolonged amounts of time in the sale process is one of the most common "deal killers".

When the seller of a privately held company decides to sell, there are four estimates of price or value:

  1. A formal or informal value placed on the company by an outside appraiser or expert.
  2. The seller's "wish price." This is the price the seller would really like to receive - best case scenario.
  3. The "go-to-market price" or the actual asking price.
  4. And last, but not least, the "won't accept less than this" price set by the seller.

The actual selling price is usually somewhere between the “go-to-market price” and the “won’t accept less than this price”. The final selling price is set by the marketplace, which is determined by the business attributes, the industry environment, the market environment.

The following are items that advisors and buyers need in order to value a business. The seller should be able to provide the buyer with information for all of the items on the following checklist. The more favorable each item is, the higher the final price.

  • Growing Market
  • Stable and Growing Historical Earnings
  • Minimal Capital Expenditures Required
  • Low Competitive Threats
  • Defensible Market Position
  • Large Market Potential
  • Solid Management Team and Workforce
  • Buyer/Seller Synergy
  • Owner or Top Management Remaining after the Acquisition
  • Product Diversity
  • Broad Customer Base
  • Multiple Supplier Options

 

The more desirable the answers to the above benchmarks are, the more likely a seller will receive a final price between the market price and the “wish” price.