Michael B. Lehner, CPA/ABV, CFE, ASA
business valuation professional buy-side due diligence.
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Public vs. private companies: Understand the key differences

Public company private businesses business valuation

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Public company data often is used to value private businesses. But there are important differences between how public and private entities operate — and your business valuation expert may need to adjust his or her methodology to account for these differences.

How public and private companies differ

Public companies are generally considered less risky than private companies. Why? Public companies tend to be large, have professional management teams and offer diversified products and services. Many operate globally. They issue audited financial statements on a quarterly basis and must report major equity transactions to the Securities and Exchange Commission (SEC).

By contrast, private companies can be large or small, but most have less than $10 million in annual revenue. They’re often run by families or a small group of managers who “wear multiple hats.” As a result, private companies tend to have fewer internal controls to prevent fraud and cyberattacks than public ones.

The smallest private companies might not even follow U.S. Generally Accepted Accounting Principles (GAAP) when preparing their financial statements, opting instead to use cash-basis or tax-basis reporting methods. A top priority when private companies prepare financial statements is to minimize taxable income — a sharp contrast to public companies that generally try to maximize earnings per share to satisfy investors.

Why use public market data

Given the significant differences between public and private companies, why do experts use public company data to value private businesses? Between SEC filings, press releases and news stories, there’s a lot of reliable information on public companies to collect and analyze.

Business valuation experts use this information to draw conclusions about 1) market returns on equity and 2) relationships between market value (such as stock price or transaction price) and financial metrics (such as EPS, operating cash flow or pretax income).

How to account for these differences

Before applying public company returns or pricing multiples to the subject company, an expert asks this critical question: “What adjustments are needed to make the comparison between the public market data and this particular private company more relevant?”

Adjustments are especially important when applying public stock data that’s reported on a minority, marketable basis to a controlling interest in a private company. Adjustments for differences in the level of control and marketability are critical. After all, minority investors in a public company typically have no control over day-to-day operations, but they can sell their stock with relative ease.

Get it right

When adjusting public company data, there’s a risk of doubling up on adjustments. So, it’s important to use an experienced business valuation expert who’s aware of the differences and knows how to account for them.

Michael Lehner

This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. In addition, any discounts are used for illustrative purposes and do not purport to be specific recommendations.