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To evaluate a private company’s valuation, first pin down what is being valued, for what purpose, and as of which date. Then compare the evidence from income, market, and asset-based methods, test the assumptions behind each, and reconcile the results rather than treating one formula or multiple as definitive. Without company-specific financial and ownership information, you can assess whether a valuation is well supported—but you cannot determine the company’s value.
Define what the valuation is supposed to measure
A valuation is an opinion of value for a defined subject, purpose, and date—not a timeless price tag for a company. A whole operating business, a controlling stake, and a minority ownership interest are different subjects. A figure prepared for a proposed sale may not answer the requirements of a tax filing, financing decision, financial report, or dispute. The relevant basis and premise of value—and any applicable professional or jurisdictional requirements—depend on the assignment. The IRS’s Business Valuation Guidelines emphasize selecting methods in light of the business interest being valued; they do not establish one standard that applies to every jurisdiction and purpose.
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Before examining a number, ask whether the report clearly states:
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- the valuation date and the reason the valuation was prepared;
- the entity, assets, or specific ownership interest being valued, including its rights and restrictions;
- the applicable basis and premise of value, and the jurisdiction or reporting requirements involved;
- whether the conclusion is enterprise value or equity value; and
- which methods were used, which evidence supports them, and how the indications were reconciled.
If a valuation is needed for a formal transaction, tax matter, financing, financial report, or dispute, confirm the applicable requirements with a qualified adviser rather than assuming a general market-value estimate will suffice.
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Compare the three valuation approaches
Professional guidance recognizes income, market, and asset-based approaches. They use different evidence and require different judgments; none is automatically best for every private company. The IRS says, “Professional judgment should be used to select the approach(es) ultimately used and the method(s) within such approach(es) that best indicate the value of the business interest.” The IRS guidelines and the CFA Institute’s 2026 refresher reading describe these broad approaches.
| Approach | Main evidence | Judgment to scrutinize | Useful checks |
|---|---|---|---|
| Income | Forecast or maintainable economic benefits, commonly cash flows | Forecast credibility, discount or capitalization rate, terminal assumptions | Test sensitivity to key assumptions; confirm the cash-flow definition matches the rate |
| Market | Multiples from publicly traded businesses or transactions involving comparable businesses | Peer similarity, timing, financial measure, and differences in control or marketability | Review the peer selection and explain adjustments rather than transferring a multiple unchanged |
| Asset-based | Underlying assets and liabilities, adjusted where relevant | Values assigned to assets and liabilities and how the method treats an operating business | Compare with earnings and market evidence when those are relevant to the assignment |
Income approach: value depends on the benefit stream and risk
An income method estimates future economic benefits and converts them to present value using a rate consistent with the selected benefit stream and its risk. A discounted cash flow (DCF) model lays out forecasts for a defined period and typically includes a terminal value for benefits beyond it. A capitalization method may suit a stable, maintainable earnings stream. These are not interchangeable shortcuts: the method needs a supportable forecast or maintainable benefit and assumptions that fit the company and assignment. The IRS guidelines discuss income methods, while the CFA Institute addresses private-company cash flows and discount rates.
For a DCF, inspect the forecast period, cash-flow definition, discount rate, terminal assumptions, and the effect of changing important inputs. A mathematically precise output is still the result of assumptions. The cash flow and rate must be consistent; for example, a rate should reflect the risk and definition of the cash-flow stream being discounted. Private-company rates may account for factors such as company size and limited access to public markets. The CFA Institute describes expanded CAPM and build-up approaches as methods used to address private-company considerations; a particular rate still needs a reasoned, company-specific basis.
Market approach: comparables need to be genuinely comparable
Market methods draw on public-company data or transactions involving similar businesses. Similarity is not established by operating in the same broad industry alone. Examine business model, scale, growth, profitability, risk, transaction timing, and the financial measure used to calculate a multiple. Check whether the comparable evidence reflects a controlling transaction or a different ownership and marketability context from the interest being valued. A quoted multiple is evidence to analyze, not a ready-made answer for another company.
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The FCA’s review of private-market valuation practices describes firms using multiple comparable sets or a small number of directly relevant assets, and notes that a change in comparability can prompt revaluation. Those are observations about firms covered by that review, not a universal rule or a finding about every valuation.
Asset-based approach: account for what the business owns and owes
An asset-based method considers relevant asset and liability values. It can be informative when asset values are central to the assignment, but it should not automatically replace earnings or market evidence when the subject is an operating concern. Ask how material assets, liabilities, and non-operating items were treated, and whether that treatment fits the purpose of the valuation. The IRS and CFA Institute recognize the asset approach alongside the income and market approaches in their guidance.
Follow the evidence from company records to a reasoned conclusion
- Write down the assignment. Record the date, purpose, jurisdiction, subject interest, basis and premise of value, and any governing requirements. Confirm formal requirements before relying on a general estimate.
- Understand how the business makes money. Review its business model, industry, customers and customer concentration, management dependence, competitive position, assets, liabilities, debt, and recent events. The conclusion should be traceable to the business’s actual circumstances, not just a sector label.
- Normalize reported results. Identify maintainable earnings or cash flow and explain material adjustments to reported figures. Check that the benefit measure used for the company is defined consistently with the measure used for comparables or the cash flows discounted.
- Develop an income indication where supportable. Make the forecast period, cash-flow definition, discount rate, and terminal assumptions visible. Test how changes to material inputs affect the indication; do not hide uncertainty behind a single output.
- Develop a market indication where relevant evidence exists. Explain why each public company or transaction is relevant, how its financial measure was selected, and what adjustments were made for differences in business characteristics, timing, or ownership context.
- Review assets, liabilities, and the equity bridge. Distinguish enterprise value—the value attributed to the operating business under the analysis—from the value attributable to equity holders. Where relevant, show how debt, cash, non-operating assets, and liabilities affect the bridge. Do not assume the two values are the same.
- Reconcile the indications. Explain why an approach deserves more or less weight based on the reliability of the forecasts, comparable evidence, and asset information. If methods produce divergent results, investigate which assumptions or evidence cause the spread instead of mechanically averaging the figures.
- Address ownership and marketability only when justified. Control premiums and discounts for lack of control or marketability depend on the specific interest, its rights and restrictions, and the circumstances. The CFA Institute and IRS guidance discuss these considerations; neither supports treating a standard percentage as an automatic final adjustment.
- Present a range and sensitivities when the evidence supports them. Show which assumptions move the outcome and how much they matter. There is no universal private-company multiple, discount rate, or adjustment percentage established for all companies by the cited guidance.
Check for weak or stale assumptions
Private-company valuation can depend heavily on inputs that cannot be observed directly in an active market. The FCA says firms in its review generally used methods with Level 3 inputs under the fair-value hierarchies in IFRS 13 and ASC 820. Separately, the Australian Accounting Standards Board’s AASB 13 material covers fair-value techniques and the observability of inputs. These standards and regulatory observations explain why assumptions matter; they do not turn a particular valuation into a universal answer.
In its review, the FCA found that many of the firms it examined lacked defined processes or a consistent approach for ad hoc revaluations after market or asset-specific events. It described practices including updating forecasts and discount-rate components, using comparable sets, and checking valuations with external providers. Treat these as findings about the reviewed firms, not as claims about every private company or valuation provider.
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- Forecasts: Are projections supported by operating history and current market conditions, or do they rely on unexplained growth or margin improvements?
- Earnings measures: Are the subject company and comparables using consistent definitions and adjustments?
- Peer selection: Are comparables similar in the relevant ways, or were they chosen mainly because data was available?
- Discount rate: Does it match the cash-flow stream and reflect the stated risk assumptions?
- Terminal value: Are terminal growth or capitalization assumptions supported rather than simply extending optimistic forecasts?
- Equity bridge: Are debt, cash, non-operating assets, and liabilities accounted for where relevant?
- Ownership adjustments: Is each control or marketability adjustment tied to the specific interest and its restrictions?
- New information: Was the analysis reconsidered after a material company-specific or market event?
For each important input, look for its source, rationale, date, and effect on the conclusion. A valuation that identifies uncertainty and explains its impact is easier to evaluate than one that presents a precise figure without showing how it was built.
What makes a valuation credible?
A credible valuation is not necessarily the one with the most elaborate spreadsheet or the highest number of methods. It defines the assignment, connects methods to relevant evidence, explains material assumptions and adjustments, and reconciles disagreements transparently. The valuation date matters: evidence or events arising later should not silently be treated as if they were known on that date. A defensible conclusion makes it possible to see what would change the result and why.
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