Valuation is a tool used by both companies and investors alike. Moreover, both public and private company valuations are possible. They are performed differently but usually for the same purposes. What makes them so different is how easily information is accessed. The terms ‘public’ and ‘private’ tell you everything you need to know.

A public company is essentially a corporation. It is considered public because ownership is not limited to a small number of founders or buyers. A corporation is owned by its shareholders. Anyone can become a part owner by purchasing shares.

A private company is owned by individuals or an organization content to continue operating the business without selling public stocks. As such, private companies are not listed on stock exchanges. Though shares are technically not sold, ownership among multiple individuals is commensurate with the amount each one has invested.

Company Valuation Basics

Company valuation is the process of looking at a variety of financials to determine a target company’s current financial position. It is conducted for the purposes of determining a target’s market value at the time of the analysis.

If you were an investor looking to put money into either a public or private company, you would find a valuation analysis report quite useful. If you were part of an ownership group, you might be very interested in a private company valuation that would give you a good idea of how the enterprise is doing.

A big part of the process, whether you are conducting a public or private company valuation, is determining how an enterprise stacks up against the competition in the current market. This tells investors whether or not a target is worth pursuing. As for the companies themselves, valuation data can be very instructive in determining short- and long-term direction.

Compiling and Analyzing Data

Compiling and analyzing data on public companies is pretty straightforward. That’s because they are required by federal law to report financials to the Securities and Exchange Commission (SEC). A due diligence provider like Utah-based Mezy can simply pull up quarterly SEC filings and run the data through their algorithms.

Things are considerably more difficult when it comes to preparing a private company valuation. Why? Because private companies are not required by law to disclose financials. Most of them do not. Their financials remain their business unless they have a valid reason for revealing them to other parties.

So how are private companies valued? The most common approach is to run a comparable analysis. Due diligence providers will compare similar public companies by looking at their published data. From that data, it is possible to extrapolate enough to provide a basic understanding of a private company.

Due diligence providers can also utilize the discounted cash flow, enterprise value, or EBIDTA models. In the end though, they all rely on extrapolating data from public companies in hopes of getting a good valuation. It is not an exact science by any means.

Private Valuations Are Estimates

It is reasonable to say that private company valuation reports are estimates. Without hard numbers to look at, there really is no way to say for sure what is going on with a target. In light of that, due diligence would require going a couple of steps further before attempting to acquire a private company. The target would eventually have to provide its data one way or the other.

Now you know the difference between public and private company valuations. It boils down to data access. Where data is relatively easy to come by for public companies, it is well protected by their private counterparts.