A Structured, Defensible Approach to Valuing a Private Company Using Market Comps

Valuing a private company using public market data requires more than selecting a comparable multiple and applying it to EBITDA. A rigorous and defensible approach separates operating risk adjustments from marketability considerations, ensures internal consistency in discount rates, and clearly bridges enterprise value to equity value.

The following step-by-step framework outlines how to use a Market Comps tool in a disciplined, conceptually sound manner for any private company.

Step 1 – Select Appropriate Public Comparables

Begin by identifying publicly traded companies that are economically comparable to your subject company in terms of:

• Industry and business model
• Revenue sources
• Margin profile
• Growth prospects
• Capital intensity
• Risk characteristics

From reliable financial sources, collect valuation multiples such as EV/EBITDA, EV/Revenue, or other relevant metrics.

Within the Market Comps tool:

1. Select the appropriate industry sector.
2. Use the Multiples Editor to input valuation multiples in minimum – average – median – maximum format.
3. Save this dataset for further analysis.

Step 2 – Determine a Representative Public Multiple

Once your public multiples are entered:

Evaluate whether the median, trimmed mean, or another statistic best represents the peer group. Then use judgment to adjust for differences in:

• Growth expectations
• Profitability
• Size and operating leverage
• Capital structure
• Cyclicality

Document the selected public multiple(s) that will serve as your starting point.

This is your marketable, public benchmark multiple.

Step 3 – Compute the Cap-Rate Ratio (Public vs. Private)

Public multiples reflect the risk, liquidity, and scale advantages of public markets. To translate them to a private company context, adjust via a cap-rate ratio.

1. Derive the Public Cap Rate

Estimate a public discount rate (cost of equity or WACC), consistent with the cash flow being capitalized. You may use CAPM to estimate cost of equity, incorporating:

• Risk-free rate
• Equity risk premium
• Beta

If using WACC, reflect the public company’s capital structure. Next, subtract a sustainable long-term growth rate.

\(Public \, Cap \, Rate = Discount \, Rate \, – \, Growth \, Rate \)

2. Derive the Private Cap Rate

Build up a private company discount rate including:

• Risk-free rate
• Equity risk premium
• Size premium
• Company-specific risk premium
• Other relevant risk adjustments

Then subtract the subject’s sustainable long-term growth rate:

\(Private \, Cap \, Rate = Private \, Discount \, Rate \, – \, Growth \, Rate \)

3. Compute the Cap-Rate Ratio

\(Cap \, Rate \, Ratio = \frac{Public \, Cap \, Rate}{Private \, Cap \, Rate} \)

Example:

• Public cap rate = 10%
• Private cap rate = 20%

Cap-rate ratio = 10% ÷ 20% = 0.5

This implies the private valuation multiple should be approximately 50% of the public multiple.

Important Consistency Checks

• Both cap rates must be based on the same type of cash flow (e.g., equity or enterprise).
• Growth assumptions must be conceptually aligned.
• Do not embed a full Discount for Lack of Marketability (DLOM) in the private discount rate – you will apply DLOM later at the equity level.

Step 4 – Adjust the Public Multiple

Apply the cap-rate ratio:

\(Adjusted \, Multiple_{private} = Public \, Multiple \times Cap \, Rate \, Ratio \)

The result is a private company multiple that reflects differences in risk, growth, and size – while still representing a marketable level of value.

Step 5 – Estimate Enterprise Value (EV)

Next, estimate the subject company’s enterprise value:

1. Enter or confirm normalized EBITDA (historical or forward).
2. Apply the adjusted private multiple:

\(EV_{subject} = EBITDA_{subject} \times  Adjusted \, Multiple_{private} \)

​This produces enterprise value under a control, marketable assumption (assuming the underlying multiple reflects control characteristics).

Step 6 – Bridge from Enterprise Value to Equity Value

Convert enterprise value to equity value:

• Start with enterprise value.
• Subtract interest-bearing debt (bank loans, bonds, capitalized leases).
• Add excess or non-operating cash.
• Add or subtract other non-operating assets or liabilities (e.g., surplus real estate, investments, off-balance sheet obligations as applicable).

This yields control, marketable equity value.

Step 7 – Apply the Discount for Lack of Marketability (DLOM)

Now address marketability separately. To do so, determine an appropriate DLOM using:

• Empirical restricted stock studies
• Pre-IPO studies
• Option pricing models
• Other supported methodologies

Ensure DLOM has not already been embedded in your private discount rate. Next, apply the adjustment:

\(Non \, Marketable \, Equity \, Value = Equity \, Value_{marketable} \times (1−d) \)

Where d represents the DLOM percentage.

This results in a non-marketable equity value at either a control or minority level, depending on your assignment.

Step 8 – Adjust for Minority vs. Control (If Required)

If your conclusion requires a minority, non-marketable value:

1. Start with control, marketable equity value.
2. Remove any embedded control premium or apply a supported minority discount.
3. Then apply DLOM to arrive at minority, non-marketable equity value.

If your assignment calls for control, non-marketable equity value, no minority adjustment is necessary – apply only DLOM.

Step 9 – Document Thoroughly

A defensible valuation requires clear documentation within your work file:

• Selected public comparables and rationale
• Chosen public multiple
• Derivation of public and private cap rates
• Calculation of cap-rate ratio
• Adjusted private multiple
• Enterprise value computation
• EV-to-equity bridge
• Support for DLOM
• Control vs. minority assumptions

Separating risk/size/growth adjustments (cap-rate ratio) from marketability adjustments (DLOM) strengthens both conceptual integrity and audit defensibility.

Numerical Walkthrough Example

To illustrate the mechanics, consider a simplified comparison between a public company (CAPM framework) and a private competitor (Build-Up method).

Using the Cap-Rate Ratio

\(\frac{7.6}{13.0} = 0.584 \)

The private valuation multiple (7.7x) is derived from the public multiple (13.1.x) by adjusting for differential risk and growth expectations.

Final Perspective

This structured approach ensures:

• Logical consistency between discount rates and multiples
• Clear separation of risk and liquidity adjustments
• Transparent support for valuation conclusions
• Strong documentation for audit, litigation, or regulatory review

By methodically translating public market data into private company valuation inputs, you produce conclusions that are analytically sound, clearly supported, and professionally defensible.

See Valuation Tour