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Overcoming the Private Firm Discount

As featured in our Q1 2013 Capital Ideas Newsletter. An article by David Sinyard, Managing Director of our Atlanta, Georgia office.

image: Q1-2-2013.jpg One of the first steps to selling a business is to determine its value. Valuation may be a complex exercise if the company for sale is private rather than public. Living in an age of information, investors are influenced by the amount of information available on a given opportunity, be it a publicly traded stock or a private company.

Publicly traded firms are highly regulated and required to provide snapshots of their financial health on a quarterly basis to all shareholders. There is significant information available on a public company, including SEC filings, investor relations departments, analyst reports, etc. Therefore, a company whose stock trades daily on an active exchange can be valued more easily than a privately held concern whose information remains confidential and private.

The lack of readily available information on private companies limits the amount of due diligence able to be performed by prospective buyers, ultimately resulting in a lower valuation compared to similar public companies. This deceased valuation, and thus lower sale price of the private company, is called the “private firm discount.” Is there any way to overcome the “private firm discount”? Definitely… given time and a smart strategy.

Finances in Order

Ensure that your finances are in good order before going to market. Throughout the course of the transaction and due diligence, be prepared to confidentially open your books to the buyer. Lack of preparation of your financial records not only delays the transaction but can also result in lower valuation and overall sale price.

Experienced Investment Bankers

Adding experienced investment bankers to you M&A team is a smart decision when attempting to overcome the “private firm discount”. They work with you to prepare your business for sale, develop marketing material, and help disseminate information in the most effective manner. Investment bankers identify, screen and confidentially approach multiple potential buyers, using a confidential competitive bid process to create an auction for the sale of your business. This increases both sale value and likelihood of closing. They will structure the transaction, negotiate terms and facilitate due diligence – working hard to achieve the best possible terms for you, while minimizing disruption and maximizing confidentiality.

Get Known

By nature, private firms are less visible and not as transparent as public companies. Unless the company is a large concern, potential buyers may not know it exists. Early on in the exit process, it might make sense to take the time and spend the resources to “get known”. Use branding, marketing and public relations to gather as much exposure as possible prior to hitting the market. When accomplishments occur, make them known. Become the leader in your field. This kind of positive information can only help put you on the radar of potential buyers, and influence valuation and sale price.

The Right Buyer Type

Another important factor to consider in a divestiture is the buyer type – the type directly impacts the valuation. There are two types of buyers:

  • Strategic Buyers
  • Financial Buyers

Strategic Buyers typically pay the highest multiples. This is because they can leverage their existing infrastructures and easily fit in their acquired businesses. Strategic buyers may buy companies to accelerate their growth rate or to add a niche that they would be unable to otherwise provide.

Financial Buyers are private acquirers, typically private equity groups (PEGs), and pay slightly lower multiples. PEGs invest in businesses in which they can add value and then exit after 5 to 7 years. To improve company performance and add value, PEGs apply three sets of changes to the firms they acquire: financial, governance, and operational engineering.

Your investment banker includes both strategic and financial buyers in their prospective buyer lists, and they will help you decide which buyer type is most appropriate for your business.

Whether strategic or financial, acquirers will likely be more aware of private targets that are related to their business or markets. Industry insiders are more comfortable valuing businesses in an industry where they have experience and expertise. If the acquirer were to buy a firm outside its core competencies, it runs the risk of overpaying. Including industry-experienced professionals on your team help you get the best terms and valuation of your business.

More Factors to Consider

Other factors that impact a business’ value include:

  • prior M&A experience
  • geographically dispersed operations
  • intangible assets of the selling company

The bottom line is that acquirers are more likely to buy firms that are in their core business or where the company has significant acquisition experience, and where the assets are not geographically spread nor highly intangible. 


The above factors all contribute to successfully overcoming all or part of the “private firm discount.” Not only do you need to find the right buyer, but you must also ensure the buyer has all the pertinent information.

As the owner of an operating business, you may not be able to do this on your own. Working with an experienced team of investment bankers, lawyers and accountants will help you find the perfect buyer and the right selling price.

For additional information contact:

Douglas Nix, CA | Vice Chairman
Corporate Finance Associates | Toronto West | 905-845-4340 x211 | info@cfaw.ca