Coming up with the value of a privately-held company is one of the hardest balancing acts that prospect researchers do. No matter how hard we try, we will get it wrong around 100 per cent of the time. The only consolation is that it’s very likely that not even the owner of the privately-held company has any idea what their own company is really worth. The value is simply what someone else is willing to pay on any given day.
The Small Business & Entrepreneurship Council reports that the vast majority of companies in the United States – 99.7% of employers – are privately-held small businesses, and firms with less than 20 workers made up 89.4 percent of businesses in America.
That’s a lot of businesses that aren’t publicly-held, but when I talk with researchers about things that are hard to do, there are few who don’t express doubt in their ability to read and interpret SEC forms. Understanding them is important, but it’s not what a researcher is going to spend 99.7 percent of their time doing, and – to my mind – valuing privately-held companies is harder by about the same percentage.
Of special note is the fact that, according to a U.S. Small Business Administration report, women own 36% of all businesses and 20% of employer businesses. That figure continues to grow as entrepreneurial women, eager to sidestep short-runged corporate ladders, continue the trend of building opportunities for themselves. As these successful women become a larger part of our frontline fundraisers’ portfolios, understanding how to value their companies (and understand their philanthropic priorities) becomes increasingly important for us, too.
So, how do we value privately-held companies?
Normally when we want to value a privately-held company, we do one of a few things:
- We get lucky and learn that the owner has revealed the information themselves, either on their company website, or in a published interview, or in conversation with a fundraiser.
- We get lucky and see that Dun & Bradstreet has estimated a value for the company in its Business Information Report. (NB: this is a red herring. D&B estimates are to be trusted as much as an unsupervised Labrador with a coffee table full of appetizers.)
When none of those pans out, we start doing the hard work of estimating a privately-held company…
- We look for a comparable company or “comp,” which means that we try to find a publicly-held company that is in the same line of business with the same number of employees in the same geographical area with roughly the same sales. We then look at the publicly-held company’s market value, and…there you go. (Except there you don’t go, because finding apples-to-apples comps are as common as finding a lost Picasso print in someone’s attic. It happens, but not often.)
- We go through a highly scientific process to estimate value using betas, estimating revenue, expenses, etc. to come up with a value. To assist you in this venture if you dare, here is a 170-slide masterclass from NYU professor Aswath Damodaran walking you through four valuation examples. (It’s useful to know this, and I do highly recommend further education on how businesses work, and balance sheets, and P & L statements because you should know this, but we’re prospect researchers, not Goldman Sachs executives working out an IPO and we’re usually on a deadline.)
- Here’s my small business, private company, back-of-the-napkin estimating tactic to use if you don’t know the company’s sales. (If you do know its sales, stop now and go to the end of this article).
This technique won’t work for every company (the sole-practitioner attorney or the self-investing money manager, for example). But I think it’s a quick conservative baseline to use for companies with ~5-25 employees because we’re going to focus on how much a small company with employees has to generate annually in order to simply pay their bills. If they’re running a demonstrably successful company, then you can be sure they’ve got at least that much (and probably more besides). How much more you want to add into the calculation based on your – and your frontline fundraiser’s knowledge – is then up to you.
First, you calculate Payroll
How many employees are there? Check the company’s website, or D&B (caveat: see above), or LinkedIn, or the company’s Facebook page.
What’s the average salary for people in that profession? Check salary websites or job descriptions on search & recruitment sites for ranges.
Now, take the employee number times the average salary = S
Multiply S times .3 to calculate benefits = B (benefits cost ± an additional third of an employee’s salary)
If this is a profession that frequently rewards employees with extras like bonuses or commission, multiply that average amount per employee to calculate Extras = E.
Add S + B + E = Payroll
Second, look at annual Costs
Ignoring things that a business owner would only have to buy once (like computers, desks and chairs, etc.) what does it cost to do what this profession does annually?
- Rent/Mortgage payment/Upkeep?
- Software fees? (Lexis? Bloomberg? Salesforce?)
Add these together to estimate Cost = C of doing business.
Add Payroll + Cost to calculate Total Expenses
This figure is what the owner has to come up with every year simply to stay afloat, so you know the company’s sales are at least its Total Expenses. (And so, to circle back to my comment earlier, if you know the sales figure, you can simply use that as a baseline to spitball the value of the company.)
Voilà, a back of the napkin company value.
Caveat caveat blah blah caveat
This isn’t perfect, I know that. But there are a lot of things we’re never going to know, like a privately-held company’s sales, its debts, and if the owner is offshoring profits.
But if we have a pile of profiles to work on and need to come up with a baseline estimation, I offer this rough estimate as a good place to start.
I’d love to hear if you have other off-the-cuff valuations that you use!