Valuation Of Private Companies in San Diego
Valuation of private companies involves complex methods and procedures of appraising the current net worth of a private entity. Unlike a public company’s valuation, which is straightforward, a private company has some challenges when carrying out its valuation. Private companies are not obligated by law to publicly declare their financial status, and their shares are not available for trade in the stock market. Private companies accounting standards are less stringent, unstandardized, and have no metrics to determine the value of their stock, making it difficult to compare them with other similar companies. However, Wiley Financial in San Diego solves these challenges by separating the intermingling personal and business finances in a family-owned private entity. A Certified Financial Analyst (CFA) uses the fundamental approach to determine the financial status of a private company. These approaches include; cost approach that entails asset-based valuation, an income approach that presents the current value of an entity, and a market approach that employs multiplier designations.
Methods of Private Company Valuation
Comparable Company Analysis (CCA)
The comparable company analysis assumes that similar companies in the same market industry have the same multiples. When conducting the valuation of private companies without sufficient financial information, financial data from a similar company is calculated using comparable multiples. When using this method, for instance, in San Diego, the private target company features such as the industry, size, and operation are identified before establishing other companies with similar characteristics in the region. After collecting these companies’ financial and fiscal information, the market industry average is calculated. Because these firms are always at different growth stages, their valuation is computed through the EBITDA multiple. The EBITDA refers to a company’s net income after the taxes have been adjusted, taxes, depreciation, and amortization. EBITDA is used to measure the target company’s cash flow approximately. A company’s valuation is achieved by using the following formula:
Value of the target company = Multiple (M) x EBITDA of the target company
Discounted Cash Flow (DCF)
Discounted cash flow method takes some features of comparative company analysis and takes it a notch higher. Unlike in the CCA formula, where a company’s cash flow is estimated using financial multiples from similar companies, DCF valuation starts by determining the financial growth rate of the target company. The revenue growth rate of a target company is determined by calculating the growth rates of similar companies in the market industry. For instance, when Wily Financial is performing DCF, it considers the company’s revenue projections, taxes, and operating expenses to generate the free cash flow of the target company. The weighted average cost of capital (WACC) is calculated using the company’s cost of debt and equity, tax rate, and capital structure. WACC is important when finding out the appropriate discount rate. Valuation of private companies using the DCF method requires complex financial modeling. Wiley Financial has extensive financial modeling experience, having performed valuations to many companies in different industries around San Diego.
The First Chicago method employs the formulas from both discounted flow and multiple-based valuation methods. The only distinct difference when performing valuation using the First Chicago method is considering a target company’s payoffs. Three scenarios are used when performing private company valuation using the first Chicago method, i.e., a base case which is indicated in the company’s business plan, a base case which is an indication of a company’s likely scenarios, and a worst-case which project the likely event of a company’s worst scenario. These scenarios are normally used when projecting the growth rates and case-specific cash flows in comparable company analysis and discounted cash flow method. Valuation of a target company is arrived at after taking the three scenarios probability-weighted average. The First Chicago method valuation is a common method used by private equity investors and venture capitalists because it provides company valuation with detailed information of the potential upside or downside risk. It is important to note that the valuations of private firms are based on estimation and market assumptions. While the growth rates and average industry estimate a company’s financial projections, it does not apply to one-time extreme conditions. Wily Financial provides a reliable valuation of private companies by incorporating complex transactions in San Diego using information from IPOs, mergers, and acquisitions.