What discount might you apply when valuing a private company compared to public company multiples?

When valuing a private company compared to public company multiples, it is common to apply a discount, often ranging from 10-15% or more. This adjustment is warranted due to several factors inherent in private companies that affect their valuation.

Private companies typically lack the same level of marketability and liquidity as public companies. Investors generally find it more challenging to sell their stakes in private businesses, thus requiring a higher return to compensate for this lack of liquidity. Consequently, this risk is reflected in a lower valuation multiple when compared to public companies.

Furthermore, private companies may have less access to capital markets, diminished visibility, and smaller financial resource pools, which can further justify a discount. The absence of a public market typically results in less rigorous financial reporting and oversight, contributing to perceived higher risk levels.

While the precise discount can vary based on the specific characteristics of the companies involved, the prevalent practice is to apply a discount in the range of 10-15% or even higher, contingent upon the particular circumstances of the private entity being valued. This approach helps align the valuation process more closely with the realities of privately held firms.