Mark Lyttleton is a speaker, angel investor and business mentor who supports entrepreneurs running both public and private companies. This article will outline the various factors that need to be considered in placing a value on a private company, exploring aspects such as private equity valuation metrics and capital structure.
Determining the value of a private company is an art as well as a science. The principal starting point is generally identifying similar companies that can be used as comparatives. It is then necessary to consider factors such as addressable market size, varying growth rates, balance sheet differences, client and product diversification, and quality of management and leadership.
The embedded PDF provides information about common board structures for private limited companies in the UK, exploring the roles of board members and why appointing a board of directors is often a critical step in scaling the operations of a growing private company.
A private company valuation provides a point-in-time snapshot of a company, enabling it to position itself for an event – typically a funding round – to raise capital to invest in the business. The embedded infographic outlines popular funding routes for business founders in the UK.
As a long-time investor in both private and public markets, Mark Lyttleton recognises that there are times when there are significant divergences between those markets. This potentially provides scope for some kind of arbitrage. For example, in the early part of the 2010s, private companies were considered by many as a less attractive investment option. However, technological advances and vast flows of money have largely reversed this trend, resulting in the creation of stunningly successful private companies like Roblox, Block and Uber.
Valuing a private company is far more challenging than valuing a public company since private companies are inherently less transparent and can have more complicated capital structures and share classes with different rights attached. Rather than reporting financials publicly or listing stock on an exchange, the financials of a private companies are generally kept private. In order to value a private company, it is necessary to use findings from its closest public competitors, looking at aspects such as the enterprise value multiple or EBITDA to determine its value.
About Prana Partners
Conceived to share knowledge acquired over many years of investing in companies, bringing a degree of humanity and collaboration to business, Prana Partners focuses on people and businesses trying to create positive societal change on many different levels rather than simply focussing on financial measures of success.