Private company valuations estimate what a business, or an ownership interest in it, is worth. They typically consider financial performance, future cash flows, assets, comparable businesses and recent investment transactions.
Unlike listed companies, private businesses generally do not have a continuously quoted share price. Their valuations require investors to examine the evidence behind the number, including the assumptions, timing and rights attached to the shares.
For wholesale and sophisticated investors considering unlisted shares, understanding how private company valuations work is an essential part of assessing an opportunity. A promising business can still be an expensive investment if the purchase price assumes too much future success.
What Does a Private Company Valuation Represent?
A valuation is an assessment made at a particular date and for a particular purpose. A figure negotiated during a capital raising may differ from a financial reporting valuation, an acquisition offer or the price achieved when an existing shareholder sells.
For financial reporting, IFRS 13 defines fair value around an orderly sale between market participants under conditions prevailing at the measurement date. This makes both timing and market assumptions central to the assessment. Source: IFRS Foundation
Investors should therefore start with a straightforward question: what exactly does the quoted valuation describe?
A statement that a business is “valued at A$50 million” leaves several questions unanswered. Does that figure include debt? Is it before or after new investment? Does it relate to ordinary shares or securities with additional protections?
The answers can materially change the investment proposition.
Common Private Company Valuation Methods
There is no single formula suitable for every business. The IFRS Foundation’s educational guidance on unquoted equity discusses comparable company multiples, discounted cash flow and adjusted net asset methods. The appropriate technique depends on the business and the information available. Source: IFRS Foundation valuation guidance
Earnings and Revenue Multiples
A multiples valuation applies a selected ratio to a financial measure, such as revenue or earnings before interest, tax, depreciation and amortisation, commonly called EBITDA.
Consider a hypothetical Australian business generating sustainable annual EBITDA of A$3 million. Applying an illustrative enterprise-value-to-EBITDA multiple of six produces an enterprise value of A$18 million.
That calculation is simple. Justifying the inputs requires more work.
Why six times earnings? Are the comparison businesses genuinely similar? Does the A$3 million include a one-off benefit that will not recur?
For a company that is growing but not yet profitable, investors might consider a revenue multiple. However, revenue alone says little about how much cash a business can ultimately generate. Two companies with identical sales can have very different margins, customer retention and funding requirements.
The multiple and the financial measure must also be consistent. A multiple based on forecast earnings should not be applied casually to historical earnings.
Discounted Cash Flow
A discounted cash flow valuation estimates future cash flows and converts them into a present value using a discount rate that reflects relevant risks. It can capture a business’s expected development over time, but its usefulness depends heavily on the forecasts.
Imagine two projections for the same hypothetical company. One assumes it reaches profitability in two years; the other assumes four years and an additional funding requirement.
Both may be presented in polished financial models. Yet they describe substantially different paths for investors.
Useful questions include whether the sales forecast is supported by contracts, whether staffing costs rise with expansion and whether the model includes the spending needed to deliver growth. Testing alternative scenarios helps reveal how much the valuation relies on favourable outcomes.
Asset-Based Valuation
An asset-based approach considers the value of a company’s assets after allowing for its liabilities. It can be relevant where value is closely connected to identifiable holdings, such as property or investment assets.
For example, a hypothetical company holding assets worth A$15 million and owing A$6 million has an initial net asset figure of A$9 million, before any further relevant adjustments.
That figure is a starting point. Investors still need to examine how the assets were valued and whether additional obligations exist. For a business whose value depends on software, customer relationships or future commercialisation, an asset-based calculation may capture only part of the picture.
Enterprise Value Versus Equity Value
Enterprise value and equity value answer different questions.
Enterprise value broadly measures the operating business independently of how it is financed. Equity value represents the value attributable to shareholders after relevant debt, cash and other adjustments.
In a simplified calculation:
Equity value = enterprise value − debt + surplus cash
Returning to the hypothetical business with an A$18 million enterprise value, assume it has A$5 million of debt and A$1 million of surplus cash. Its equity value would be A$14 million.
If it had 10 million ordinary shares, all with identical rights and no options, convertible instruments or other claims, that would imply A$1.40 per share.
These distinctions matter because investors purchase particular securities. A headline business valuation does not, by itself, establish what those securities are worth. The IPEV valuation guidelines address the allocation of business value across financial instruments and differing rights. Source: IPEV Valuation Guidelines
Pre-Money and Post-Money Valuations Explained
During a capital raising, a pre-money valuation describes the agreed equity value before new investment. A post-money valuation includes the new capital.
In a straightforward priced equity round:
Post-money valuation = pre-money valuation + new investment
Suppose a hypothetical company raises A$5 million at a pre-money valuation of A$20 million. Its post-money valuation is A$25 million, and the new investors collectively receive 20% of the company.
Existing shareholders collectively hold the remaining 80%, assuming no other changes to the capital structure.
The A$5 million increase does not mean the existing business has instantly become more commercially successful. The company has received additional cash in exchange for issuing new shares.
Option pool changes and convertible instruments can complicate ownership calculations, so investors should examine the fully diluted capitalisation table alongside the headline valuation. Carta’s pre-money and post-money valuation guide
Why the Latest Funding Round Is Only Part of the Picture
A completed funding round provides evidence of what investors were willing to pay at that time. However, its relevance changes as the business and its circumstances develop.
A company may outperform its forecasts, lose an important customer, consume more cash than expected or face weaker demand. The rights attached to newly issued shares may also differ from those held by existing investors.
Preferred shares, for example, may provide priority over ordinary shares when proceeds are distributed following certain exit events. Applying the preferred share price to every ordinary share can therefore be misleading.
The IPEV guidelines treat recent transaction prices as evidence requiring assessment against current circumstances and the characteristics of the investment. IPEV Valuation Guidelines
For an investor, the practical question is whether the earlier price remains a useful reference for the security being purchased today.
How Liquidity Influences Private Share Prices
The ability to sell an investment is another part of the valuation discussion. A shareholder may need to find an eligible buyer, satisfy transfer conditions and allow time for a transaction to complete.
As explored in Understanding Liquidity in Private Markets, liquidity depends on buyers, information, pricing and the process for completing a transfer.
Consider a hypothetical shareholder seeking A$2 per share because that was the company’s last funding price. A prospective buyer offers A$1.60.
The difference prompts investigation. Is the funding price outdated? Do the shares carry different rights? Has performance changed? Does the seller need a quick exit?
A lower price is not automatically a bargain, just as an asking price is not proof of value.
Secondary transactions can provide useful evidence of what buyers and sellers will accept. However, one small transaction should be interpreted in its context, especially where information is limited or trading is infrequent.
What Investors Should Examine Behind the Valuation
A useful assessment connects the valuation to financial records, commercial progress and the security’s terms.
Start with the valuation date and who prepared the assessment. Then examine whether its earnings and revenue figures are historical, forecast or adjusted. Ask what has changed since the underlying information was produced.
Cash requirements deserve particular attention. A company might reach its operational targets yet require another substantial capital raising along the way. Investors should consider how that funding could affect their ownership and eventual returns.
It is also worth testing the investment case under less favourable conditions. What happens if growth is slower, margins are lower or the anticipated exit occurs several years later?
Formal valuation processes benefit from documented assumptions, appropriate challenge and attention to conflicts of interest. These were among the issues examined in the UK Financial Conduct Authority’s review of private market valuation practices. FCA valuation review
Looking Beyond the Headline Number
Understanding how private company valuations work helps investors make more meaningful comparisons between opportunities.
The most useful assessment connects the business’s performance and prospects with its funding needs, capital structure and the rights attached to the shares. It also recognises that a valuation is an estimate at a point in time, while an achievable sale price depends on an actual transaction.
For wholesale and sophisticated investors, this means asking what must happen for the proposed valuation to be justified—and what the investment could look like if those expectations are not met.
PrimaryMarkets facilitates capital raising and secondary trading opportunities in unlisted investments. Investors exploring these opportunities can use valuation analysis alongside company information and due diligence to assess how a proposed price relates to the business and the securities on offer.