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What is a Private Equity Valuation?

Jim B.
Jim B.

Private equity valuation is the process by which a private investor attempts to determine the value of a company in which he potentially could invest. This process usually requires a detailed analysis of the business operations of a company over a period of several years along with a projection on that company's future potential. Investors will use a private equity valuation as a technique to determine if they should attempt a leveraged buyout of a private company. There are many methods available for valuation, ranging from analysis of earnings reports to an in-depth examination of every aspect of the company's operations.

Investments on companies can come on the open market, which is when investors buy shares of stock in a company and hope that the share price rises in accordance with the company's fortunes. Other investments come in companies that are privately owned and may be in need of capital to either improve their business or to simply survive. This requires an investor known as a private equity investor, a wealthy individual of group who seeks to gain a controlling share of the company or even own it outright. A private equity valuation of the company can determine whether the company is a good investment vehicle and how much the investor is willing to pay.

Businessman with a briefcase
Businessman with a briefcase

When making a private equity valuation, investors should do so with their ultimate goals in mind. For instance, an investor wishing to have a passive role in the company and simply make money when it is resold may have different questions he needs answered by a valuation than someone wishing to take an active role in the company. The company's potential also needs to be considered, especially if investors one day wish to take the company public via an initial public offering.

One of the goals in performing a private equity valuation is determining the fair market value of the company. This value is the price that should be paid for the company if there was no pressure on the company to sell or no excess motivation on the investor to buy. With the motives removed from the equation, the fair market value is the benchmark from which negotiations can begin.

Earnings reports are the most simplistic method of private equity valuation, as long as they can be projected into future years with some degree of certainty. Other investors may concentrate on the value of the assets a company currently has and weigh that against its liabilities. Valuation may also take the form of subjective analysis, such as where the company stands in terms of its market competition, how strong is the management team, and other factors that can't be boiled down to mere numbers and statistics.

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