Valuation of Private vs. Public Companies

Private company valuations are discounted based on several risk factors associated with private sector investment, which results in a marked difference between the valuation of a privately held company, subsidiary or a division and a publicly traded corporation. There is a number of distinctions between private and public companies that have an impact on the private company’s value. An accurate valuation of privately-owned companies largely depends on the availability and reliability of the private company’s historic financial information. Public company financial statements are officially audited, documented and overseen by a government regulator. Alternatively, private firms do not have government oversight unless operating in a regulated industry and usually audited financial statements are not required.

Moreover, private companies may manage their operations for different purposes than profit. Managers of private firms often prepare their financial statements to minimize profits and, therefore, taxes. Alternatively, managers of public firms tend to want higher profits to increase their stock price. As a result, a firm’s historic financial information may not be accurate and can lead to over- and undervaluation. In an acquisition, a buyer often performs due diligence to verify the seller’s information. When analysts put a value on a particular private company, privately held companies are often valued lower than their public counterparts. The lower value is attributed to the fact that there is no liquid market for the private company’s stock. Such discounts are accounted for during valuation.