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Valuing privately held companies is always challenging because details of private transactions are rarely available. Privately owned companies can use valuation metrics readily available from publicly traded companies. We often use public company comparable analysis (“public comps) to estimate private companies’ current market value.
To properly run Public Comps, we have found that utilizing the following levers provides the most accurate prediction of value for a privately held company: strong samples of comparable publicly traded companies, a Discount for Lack of Marketability (DLOM), a control premium (as individual shares of public companies do not afford control if selling your private company does yield control), and a size discount (assuming your company has revenue under $150 million).
Strong Samples of Comparable Publicly Traded Companies
The foundation of a robust public comps analysis is the selection of appropriate comparable companies. We focus on identifying public companies within the same sector that share similar operational characteristics, market positions, and financial metrics with the subject private company.
Discount for Lack of Marketability (DLOM)
DLOM discounts a comparable public multiple by reflecting the reduced value of an interest in a company due to its illiquidity. It acknowledges the difficulty in quickly converting shares into cash without a significant price adjustment.
Control Premium
A control premium reflects the additional value a private company has as opposed to a public company when making strategic decisions.
Size Discount
Smaller companies generally face higher risks and lower market liquidity than their larger counterparts. As a result, a size discount is applied to account for these factors.
We use many sources with large sample sizes for each lever mentioned above to derive an accurate approximation. We have compiled our proprietary deal data and third-party reports into a database that allows us to achieve precise valuation predictions tailored toward private lower-middle market aerospace and defense companies.
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