Private Company Valuation
When a private company is seeking loans, investment funds or a sale, a thorough valuation that establishes a fair value of net tangible assets (book value) is a strong complement to the firm's current balance sheet and income statement. Book value and ownership equity are often treated as the same thing. They are not, as intangible assets and other items are subtracted to arrive at the book value. This is a good starting basis for investment and purchase discussions.
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Function
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A company valuation attempts to determine the true value of a company. If you were considering investing in or buying a going business, a fair value would need to be established. A proper company valuation functions as this value estimation. It is not the only component of the true value of a company: For example, some companies have high levels of "intangible" assets (like future product development, patents pending, new ideas or software under creation) that indicate a real value much higher than book value.
Considerations
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In addition to the numbers, one should consider the "quality" of the company's assets, the nature of their liabilities and their net tangible assets (which equals the book value). For example, assets whose useful life will end in the near future or high long-term liabilities (debt) may result in a lower valuation. Large numbers of newer assets or the absence of large debt will increase the value of a company.
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Warning
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A private company valuation is sometimes much more difficult to arrive at than a public company valuation. Because they have registered securities and many stockholders, public companies must continue to publish their financial statements and information, which are audited by outside certified accountants. Private companies are under no such requirement. They may have a few stockholders, but their securities are not registered. If you are considering investing in or purchasing a private company, confidence in their financial numbers and apparent net worth and book value must be established.
Benefits
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A reliable private company valuation permits an investor to make an informed decision, and if the company is for sale, helps establish a starting selling price that both seller and buyer can use as a basis for purchase discussions. Due to other considerations, the book value is usually not the final selling price, but a proper net-tangible-assets valuation shows the seller what the business is currently worth on paper, and gives a prospective buyer confidence about what is really being purchased.
Potential
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A correct private company valuation also creates the potential for future growth. Should loans or investment funds be needed, the valuation displays a true value of the company and provides a basis for pro forma (projected) financial improvements. Also, if a potential purchaser has the desire to take a company public (meaning to register securities and sell to outside stockholders) in the future, analyzing complete private company valuations can help target the right businesses for this growth.
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Resources
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