Michele Borucki
The value of a private company can have a major impact on a prospect’s philanthropic capacity and may represent a significant portion of their wealth. Unlike public companies, however, private businesses are not required to disclose detailed financial information, making them much more difficult to evaluate. As a result, prospect researchers often need to combine available data, industry knowledge, and informed judgment to arrive at a reasonable estimate.
What Is a Private Company?
A private company is owned by individuals or groups rather than public shareholders. These businesses can take many forms, including sole proprietorships, partnerships, LLCs, and privately held corporations. While private ownership offers greater control and fewer regulatory requirements, it also means that financial information is often limited or unavailable.
Private companies range from small family-owned businesses to major enterprises such as Koch Industries, Cargill, IKEA, and Deloitte.
Remember, Not All Private Companies Are the Same
Before attempting a valuation, it’s important to understand the type of business you’re researching:
- Small businesses are often closely tied to their owners and may be more valuable as income-generating assets than as highly marketable businesses.
- Startups are frequently valued based on future growth potential rather than current earnings. While valuations can be impressive, the underlying wealth may be illiquid and uncertain.
- Recently sold businesses can provide some of the strongest valuation clues, though sale proceeds may be distributed among multiple owners and structured through stock, earnouts, or other arrangements.
Common Valuation Methods
Comparable Company Analysis
One of the most practical approaches is comparing the company to similar businesses that have been sold or to publicly traded companies in the same industry.
Researchers can gather basic information from sources such as Dun & Bradstreet, ZoomInfo, Crunchbase, PrivCo, LinkedIn, company websites, news articles, and press releases. Key factors to compare include:
- Industry and business model
- Revenue
- Employee count
- Geographic market
- Growth stage
When using public-company comparisons, remember that private companies are generally worth less than similar public companies because they are less liquid and harder to sell. This “liquidity discount” should be factored into estimates.
It’s also helpful to review multiple comparable companies rather than relying on a single example. This creates a valuation range and reduces the impact of outliers.
Using EBITDA Multiples
Another common valuation method involves estimating a company’s Enterprise Value (EV) using EBITDA and an industry-specific multiple.
Enterprise Value = EBITDA × Industry Multiple
If EBITDA is unavailable, researchers can estimate it using revenue and industry profit margins.
As a general guide:
- 3x-5x EBITDA: Restaurants, local retail, landscaping, and other lower-growth businesses
- 6x-8x EBITDA: Manufacturing, distribution, and established service firms
- 10x-15x+ EBITDA: Technology, SaaS, and specialized healthcare companies
Different industries command different multiples because investors value future growth potential differently. A software company, for example, can often scale much more easily than a local service business.
What Information Can We Actually Find?
Understanding these limitations is important because valuations are often built on incomplete information.
| Often | Sometimes | Rarely |
| Industry, location, and business description | Ownership information | Exact ownership percentages |
| Estimated revenue ranges | Funding rounds and investor activity | Complete financial statements |
| Leadership and founder information | Revenue trends | Debt and liability information |
| Employee counts | Acquisition details | Detailed profit distributions |
| News coverage and growth indicators | Indicators of financial performance | Profit-sharing arrangements among owners |
Translating Company Value into Personal Wealth
One of the biggest mistakes researchers can make is assuming that company value equals personal wealth.
Business owners generate wealth through a variety of mechanisms, including salary, bonuses, distributions, and equity ownership. How much of a company’s value actually contributes to a prospect’s philanthropic capacity depends on factors such as:
- Ownership percentage
- Liquidity
- Profit distributions
- Stage of business growth
- Ability to sell or transfer ownership
For example, a founder may own a company valued at tens of millions of dollars but have little accessible cash if the business has never been sold or experienced a liquidity event. Conversely, an owner of a smaller but profitable company may receive substantial annual distributions that have a more immediate impact on giving capacity.
So, what IS that private company worth and how do we factor it into our ratings?
Honestly, we will never know for certain. The point of doing a comparable or using a quick formula is to get an idea of a value to factor into the capacity rating, but, how important is being accurate here if we already have access to and know much about the prospect’s public assets? Remember, the company value itself isn’t the same as the individual’s wealth, since ownership percentage and liquidity both play a big role in how that translates to capacity. This is where it’s important to remember not to get hung up on the nitty gritty details.
Jen Filla mentions on her blog, “Before you dive deeply into any specialized research, consider the law of diminishing returns. At what point are the time and resources you spend going to outweigh the benefit?” That is never truer in our line of work than assessing the value of a private company or the compensation for someone who works for one. Once you have a reasonable range and a general sense of ownership, that’s typically enough for our purposes, and at that point it’s okay to move on. Since we aren’t putting in an offer to purchase the company, using ranges, even larger ones, is sufficient for us as prospect researchers to complete a philanthropic capacity rating estimate.
