A Private Equity Valuation Primer

This article summarizes the use of the four principal methodologies that private equity (PE) professionals use to assess the worth of closely held businesses. The methodologies are comparable public companies, comparable acquisitions, discounted cash flow, and leveraged buyout. The study also briefly examines a few special valuation cases that fall outside of the four most used methodologies. PE practitioners employ these methods 1) to negotiate the worth of potential investment candidates, 2) to assess the exit pricing of their investments, and (3) to mark to market the value of their unsold portfolio companies. None of the valuation approaches are fool proof, and practitioners generally use several methods in concert to obtain the best value estimate for a private business.