Valuation is a range, not a number
The first thing to understand about valuing a private company is that there is no single correct answer. A valuation is a considered range, produced by applying more than one method, testing the assumptions each depends on, and forming a judgement about where within that range the business sits. Anyone who presents a private-company valuation as a single precise figure, without the reasoning and the range behind it, is offering false comfort.
This matters because the range is where the real information lives. A wide range signals that the value depends heavily on assumptions that are genuinely uncertain, which is itself something a buyer or seller needs to know. A narrow range signals a business whose value is well anchored. The width of the range is a finding, not a failure of the exercise.
The common methods, in principle
Several methods are used to value private businesses, and each looks at value from a different angle. Applying more than one is not redundancy, it is triangulation.
- Earnings multiples: applying a multiple, drawn from comparable transactions or companies, to a normalised earnings measure. Simple and market-anchored, but only as good as the comparables and the earnings normalisation.
- Discounted cash flow: projecting the future cash the business will generate and discounting it to present value. Rigorous in principle, but highly sensitive to the growth and discount-rate assumptions it rests on.
- Net assets: valuing the underlying assets less liabilities. Most relevant for asset-heavy or investment businesses, less so where value lies in earnings and goodwill.
Why the methods disagree
Applied honestly, the methods rarely produce the same number, and the disagreement is informative rather than a problem to be averaged away. A discounted cash flow that sits well above an earnings multiple usually means the projections embed growth the market is not yet paying for, which invites the question of whether that growth is real. A net-asset value well above an earnings-based value suggests the assets are not being worked hard enough, which is itself a thesis for a buyer.
So the sensible response to divergent methods is not to take the average but to understand why they diverge. Each gap points to an assumption doing a lot of work, and interrogating that assumption is where the genuine analysis happens. The methods are instruments for surfacing the questions, not machines for producing an answer.
It is worth being explicit that comparability is where most valuation disputes actually live. Two businesses in the same sector can warrant very different multiples because of differences in growth, customer concentration, recurring revenue, or the durability of margins, and a comparable set assembled without adjusting for those differences produces a number with a false air of authority. The work that separates a serious valuation from a superficial one is precisely the work of deciding which comparables are truly comparable, and adjusting for the ways in which they are not.
From a range to a number
A transaction needs a single price, and the move from a defensible range to an agreed number is made in negotiation, not in the model. Where within the range the price lands depends on things the methods do not capture: the competitive tension in the process, the relative need of each side to transact, the structure of the consideration, and the protections each party secures. A seller in a competitive process lands higher in the range; a buyer with a genuine walk-away position lands lower.
This is why valuation and process are inseparable. The same business is worth more to a seller who has run a real competitive process than to one who has negotiated with a single party, not because the underlying value changed but because the negotiating position did. A valuation prepares a party to hold a position; it does not settle the price on its own.
The judgement no formula replaces
For all the method and rigour, valuation finally rests on judgement: about which comparables are truly comparable, which projections are credible, how much weight to give an uncertain but material assumption, and where within the range the evidence points. That judgement is what a party is really buying when they engage an adviser, and it is the part no spreadsheet supplies.
Understood this way, a valuation is a tool for making a better decision under uncertainty, not a claim to have removed the uncertainty. The parties who transact well are the ones who treat the number that way: as a considered, defensible position to negotiate from, held with conviction and adjusted with reason.
This is general information about valuation principles, not a valuation and not investment, legal, tax or financial product advice.
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