The similarities and differences between valuation of public and private companies

Although private and public companies are distinct, their valuations share certain similarities. Both necessitate a comprehensive understanding of the company’s financial status, market position, and growth potential. Key factors such as revenue, profit margins, and cash flow analysis play critical roles in assessing the value of both types of entities. Moreover, comparable company analysis, discounted cash flow (DCF) methods, and earnings multiples serve as common approaches for valuing both private and public enterprises. Despite their inherent differences, the fundamental aspects evaluated in the valuation processes often exhibit overlapping factors.

Market Liquidity:

In the case of public companies, investors can switch their investments to different stocks of public companies on a daily or even more frequent basis. On the other hand, privately held firms need help quickly selling their stores, resulting in a corresponding decrease in their value. The limited ability to sell shares promptly in the market contributes to the decline in their overall worth.

Comparative Profit Measurement:

While private firms aim to minimize taxes, public companies prioritize maximizing earnings for shareholder reporting. To make the profitability of a private company comparable to a public one, restating its payments may be necessary. Public-company multiples usually rely on net income (after taxes), whereas private-company multiples often consider pre-tax (and sometimes pre-debt) income. This difference can skew the valuation formula for private companies, making it crucial to address these discrepancies when evaluating private firms.

Assessing Capitalization:

Public companies in a given industry typically maintain relatively similar capital structures (debt-to-equity ratios), resulting in comparable price/earnings ratios—where earnings encompass debt servicing. In contrast, private companies in the same industry often exhibit widely varying capital structures. Consequently, the valuation of a privately held business frequently relies on its “enterprise value” (the pre-debt business value) rather than the business’s stock value, unlike in public companies. 

Operational Risk Profiles:

Public companies typically ensure a higher degree of operational continuity compared to smaller, privately held firms. Economic downturns or shifts in the business landscape—like heightened competition or regulatory alterations—often exert a more pronounced influence on the performance and market positioning of private companies than on public companies. 

Incentive Structures: 

The public sphere is driven by incentives that might skew how information is presented. Advisors might be motivated by fees, and the media might emphasize engaging stories for readership. Such herd behavior could go viral, scrutinizing the intentions behind the information when valuing a public company. In contrast, owners of private companies typically have their wealth closely tied to the company’s value, requiring less effort to understand their primary aim when determining company value.

Economic Impact:

The macroeconomic scenario significantly impacts public companies more than private ones. For public firms, fluctuations in interest rates or currency exchanges yield pronounced effects, often requiring a short-term focus. Private companies, however, experience less pronounced impacts from the broader economy on their value. Their valuation primarily hinges on factors like interest rates and the availability of debt financing. 


The valuation process for public entities is inherently more challenging due to a multitude of considerations, such as dealing with derivatives like options, forwards, futures, and swaps, and the significant impact of hedge funds, speculation, and short selling, constituting a sizable chunk of trading value on major stock exchanges like the NYSE. However, the complexities of the private market are vast and varied, often surpassing the ones found in public companies.

Given the complex nature of private company valuations, relying solely on public company price/earnings ratios for their determination is challenging. Due to these intricacies, we highly recommend seeking guidance from an experienced professional in private company valuations to navigate this task effectively.

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