Step-by-step guide to valuing a mid-sized private company: methods, the numbers that matter and mistakes that lower the price, based on Aswath Damodaran.
Almost every business owner has been asked: "what is your company worth?". And almost all of them answer with a number they heard from someone, or with the value they feel is fair after years of work. Knowing how to value a private company avoids that guess, which usually shows up at the worst moment: when a buyer, a partner or an investor arrives with different math.
The calculation is not only for selling. It helps when negotiating a new partner, planning succession, raising credit and, above all, deciding what to do in the coming years so the business is worth more.
This guide shows, step by step, how to think about the value of a mid-sized company. It draws on the ideas of Aswath Damodaran, a professor at New York University and one of the world's leading authorities on valuation, with examples from machinery, agricultural equipment and logistics companies.
Price is not value
Damodaran's first lesson is to separate two things the market mixes up all the time. Value is what the company is worth based on its ability to generate cash over the years. Price is what someone is willing to pay today, influenced by market mood, urgency, competition among buyers and negotiating power.
In practice, the owner needs to know both. Value gives the reference point to turn down a bad offer. Price shows what is happening in deals for similar companies. An agricultural implement manufacturer may be worth one figure on paper and sell for more if two strategic buyers compete for the same market, or for less if the sector goes through a difficult year.
Another central idea of the author: every valuation carries the opinion of whoever made it. Buyers tend to pull it down, sellers up, and whoever was hired by one side rarely reaches a number that contradicts the client. So be wary of a single number presented as the truth, and always ask which assumptions sit behind it.
The three drivers of value: cash, growth and risk
Damodaran sums up the valuation of any business in a few questions. How much cash does the company generate? How much will that cash grow? And what is the risk that it will not materialize? Every valuation method, from the simplest to the most sophisticated, is a way of answering these three questions.
- Cash. Not revenue or accounting profit, but the money left after paying for operations, taxes and the investments needed to keep the plant running. A manufacturer that sells well but must replace machines every year generates less cash than it seems.
- Growth. Growth only adds value when the return on invested capital exceeds the cost of that capital. Growing through low margins or overly long payment terms can even destroy value.
- Risk. The more uncertain the future cash, the less it is worth today. Dependence on one customer, a single supplier or the owner raises perceived risk and lowers the price.
This view helps the owner move from "what is it worth?" to the question that really matters: "what can I change so it is worth more?".
How to value a private company in 7 steps
- 1. Define the purpose. A full sale, a partial sale, a new partner, succession or fundraising change what is being valued. Selling 30% of a family business is not simply worth 30% of the whole: control and liquidity count.
- 2. Organize 3 to 5 years of figures. Income statement, balance sheet, cash flow, debt, receivables and inventory. Without reliable numbers, any method becomes a guess, and the buyer discounts that uncertainty from the price.
- 3. Normalize earnings. Remove personal expenses paid by the company, owner salaries out of line with the market, one-off revenue, and rent on the owner's property above or below market. The goal is the result a new owner would have.
- 4. Calculate EBITDA and free cash flow. EBITDA is operating earnings before interest, taxes, depreciation and amortization. Free cash flow subtracts taxes, investments and changes in working capital.
- 5. Use at least two methods. For mid-sized companies, the most common approach is to cross-check market multiples with discounted cash flow. If the two give very different results, an assumption needs revisiting.
- 6. Move from enterprise value to equity value. From the value of the operation, subtract net debt (loans minus cash). Labor, tax or environmental liabilities also come in here.
- 7. Work with a range, not a single number. Build a conservative, a likely and an optimistic scenario. Damodaran insists that uncertainty is no excuse for not valuing; it is a reason to show the range clearly.
To get a first figure in a few minutes, the Bullseye Value Thermometer gives an estimate based on multiples for your sector and sends the range to your e-mail.
The main valuation methods
Damodaran divides valuations into two broad groups: intrinsic valuation, which estimates value from the company's own future cash, and relative valuation, which compares it with the prices of similar companies. He notes that most valuations done in the market are, in fact, relative. For the owner, the ideal is to use both and understand why they differ.
- Market multiples. EBITDA or earnings multiplied by a factor observed in deals in the same sector. Works well for mature companies with stable results. The caveat: truly comparable companies are hard to find, and a listed company's multiple does not apply directly to a private one.
- Discounted cash flow. Projects the cash of the coming years and brings it to today at a rate that reflects risk. Suits companies with a clear growth plan. The caveat: small changes in the rate or growth change the result a lot.
- Asset-based. Adds up assets and subtracts debts. Fits asset-heavy, low-profit companies or those winding down. The caveat: it ignores brand, customer base and team.
A simple example: a poultry equipment manufacturer has adjusted EBITDA of 6 million. If similar businesses changed hands at 5 times EBITDA, the operation would be worth about 30 million. With 8 million in net debt, the equity value would be close to 22 million. Discounted cash flow helps check whether that multiple makes sense for that company's growth and risk.
The figures in the example are illustrative. The right multiple depends on sector, size, margin and market timing.
What raises and what lowers value
Damodaran reminds us that numbers alone do not convince: every valuation tells a story about the company's future, and the numbers must be consistent with it. At the negotiating table, the buyer tests that story point by point. What usually raises value:
- Recurring revenue. Maintenance contracts, spare parts and customers who buy every year.
- Management that works without the owner. A prepared leadership team, written processes and decisions that do not depend on one person. We covered this in the article on owner dependency.
- Diversified customers. No single customer above 15% to 20% of revenue is a good sign.
- Well-organized figures. They reduce distrust and shorten negotiations.
- A clear edge. A recognized brand, proprietary technology, a dealer network or access to financing lines.
What usually lowers value:
- Hidden liabilities. Labor, tax or environmental issues uncovered in due diligence.
- Mixing personal and company finances. Personal expenses, property and vehicles with no separation.
- Concentration. One customer, supplier or product accounting for most of the results.
- Poorly managed working capital. Idle inventory and long collection periods consume the cash that would give the company value.
Common mistakes owners make when valuing their own company
- Using revenue as the basis. "A company is worth one times revenue" is a rule of thumb from casual talk. Two companies with the same revenue can have very different values because of margin and risk.
- Adding up past effort. Buyers pay for the cash the company will generate, not for the years of work the owner put into it.
- Copying a multiple from the news. The multiple of a large listed company does not apply to a mid-sized private manufacturer.
- Believing a number is exact. Damodaran warns that precision in valuation is an illusion: what matters is knowing where each assumption comes from and how much it weighs.
- Valuing only when a buyer shows up. Owners who know their company's value in advance negotiate better and have time to fix what lowers the price. See also how to increase your company's value before a sale.
Conclusion: start with the number, finish with strategy
Valuing a company is not a one-off exercise at the time of sale. It is a way of seeing the business as a buyer would: cash, growth and risk. Owners who run this calculation every year find out early what is lowering the price and have time to change it.
In a real negotiation, the number on paper is only the start. The final price depends on finding the right counterpart: the strategic buyer who sees synergy, the partner who brings market access, the investor who understands the sector.
Frequently asked questions
What is the most common method to value a mid-sized company?
In negotiations, the most common is the EBITDA multiple, cross-checked with discounted cash flow. The asset-based method applies when the company has many assets and little profit.
How much does a valuation cost?
An initial estimate can be done in minutes with online tools such as the Value Thermometer. A full valuation report by a consulting or audit firm costs much more and is advisable once a negotiation is underway.
How often should I value my company?
Once a year is a good rhythm, together with the year-end accounts. Before any conversation with a buyer, partner or investor, it is worth updating.
Is a minority stake worth proportionally less?
It can be. A minority stake, without control and hard to resell, usually trades at a discount. See how to sell part of your business without losing control.
Who is Aswath Damodaran?
A professor of finance at New York University's Stern School of Business and the author of reference books on valuation, including "The Little Book of Valuation".
Want a first idea of what your company is worth? Run the simulation on the Value Thermometer and get the range by e-mail. If your next step is to find a buyer, a partner or an investor, Bullseye connects the right parties. We do not run the transaction: we connect the parties. Talk to us.
