How to Calculate Market Value of Shares of a Private Company

Imagine owning shares in a company that isn’t publicly traded. You have no easy way of knowing how much those shares are worth because there’s no open market setting the price. Yet, many investors and company founders find themselves in this situation, needing to estimate the value of shares in a private company. The question is: how do you calculate the value of these shares when no public exchange is doing it for you?

Here’s where we start digging. First, let's tackle the market value, which is generally the worth of a company based on what it could fetch in a sale. Public companies have their market values determined by the stock exchange — their market capitalization is calculated as the current stock price multiplied by the total number of outstanding shares. But private companies, without public stock, need a more intricate approach.

Methods of Valuation

1. Comparable Company Analysis (CCA)

One of the most common ways to value shares of a private company is by using comparable company analysis (CCA). This involves identifying similar public companies in the same industry, with comparable business models and revenue sizes. You look at the valuation multiples of these public companies, such as the price-to-earnings (P/E) ratio, the enterprise value-to-EBITDA (EV/EBITDA) ratio, and others. Once you’ve determined these ratios, you apply them to your private company’s financial data.

For example, if public companies in your sector are typically valued at 10x EBITDA, and your private company’s EBITDA is $5 million, then your private company might be worth approximately $50 million.

Metric	Value from Comparable Public Companies	Your Private Company
P/E Ratio	15	$3M Earnings
Implied Valuation	N/A	$45M

This is where things get interesting. Private company shares are often valued at a discount compared to public shares because of their lack of liquidity and the absence of a regulated marketplace.

2. Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) analysis is another powerful method. This approach estimates the value of a company based on its future cash flows, adjusted for the time value of money. Essentially, what you're asking is: How much are future profits worth today? In a DCF, future free cash flows (FCF) are projected and then discounted back to their present value using an appropriate discount rate, typically the company's weighted average cost of capital (WACC).

This method is highly reliant on the assumptions you make about future growth, profit margins, and the discount rate. Therefore, it’s more suitable for mature companies with relatively stable and predictable cash flows. If you're valuing a high-growth startup, the DCF method may be trickier, as forecasting future earnings becomes more speculative.

3. Precedent Transactions

Another tactic is to examine precedent transactions — past mergers and acquisitions of similar private companies in your industry. This method relies on historical data from transactions where private companies were sold. By analyzing the sale price of similar companies, you can gauge the market value of your own.

For example, if a similar company in your industry was recently sold for $100 million, and it had annual revenues of $20 million, that’s a 5x revenue multiple. You can apply that multiple to your company to estimate your value. However, keep in mind that each deal is unique, and terms of a specific transaction might not perfectly fit your company’s situation.

4. Venture Capital Valuation (VC Method)

This method is frequently used for startups and is based on projected returns to investors. Venture capitalists often calculate the post-money valuation of a startup by looking at the expected exit value (i.e., what the company will be worth at IPO or acquisition), the return on investment they need, and the amount of money they plan to invest.

For instance, if they’re looking for a 10x return on a $1 million investment and they estimate your company could be worth $50 million in five years, they might value your company today at $5 million. This method requires forecasting not just your company's growth, but also market conditions and the timing of potential liquidity events.

5. Asset-Based Valuation

For private companies with significant tangible assets, an asset-based valuation might be appropriate. In this case, the value of the company is simply the sum of its assets minus its liabilities. This approach is often used for companies that are asset-heavy, such as real estate firms or manufacturers, but may not work well for high-growth companies that rely more on intellectual property or future revenue potential than current assets.

Challenges and Considerations

Lack of Market Liquidity

One of the biggest challenges in valuing private company shares is the lack of liquidity. Unlike public shares, private shares can’t be easily bought and sold, which often leads to the application of a liquidity discount — typically around 20% to 30% — to the estimated value of private shares. This reflects the risk and inconvenience of holding shares that aren’t readily tradable.

Control Premium

Sometimes, owning a large stake in a private company can command a control premium. This means that if you own enough shares to have a controlling interest in the company, your shares might be worth more. Investors are often willing to pay a premium for control, as it allows them to dictate the company’s direction, influence strategy, and unlock additional value.

Minority Discount

On the flip side, minority shareholders might face a discount on their shares. Without control of the company, minority shareholders have less power and influence, which can reduce the attractiveness — and therefore the value — of their shares.

Conclusion: Bringing it All Together

Ultimately, calculating the market value of shares in a private company involves multiple factors and a variety of methods. No single approach will give you a perfect answer. Instead, savvy investors and analysts often use a combination of methods — such as comparable company analysis, DCF, and precedent transactions — to arrive at a more comprehensive view. From here, they may apply liquidity discounts, control premiums, or minority discounts to fine-tune the valuation further.

Keep in mind that valuation is both an art and a science. It’s not just about the numbers but also about the assumptions behind them. So, while the process may seem complicated, understanding the methods available can empower you to make informed decisions about the value of private company shares — whether you're buying, selling, or simply trying to understand the worth of what you own.