Valuation Methodologies in Private Company Transactions
The art and discipline of valuing private businesses
Valuation lies at the heart of every corporate transaction, from M&A and buyouts to share buybacks and equity incentives.
For private companies, where there is no active market for shares, the process requires a combination of financial analysis, judgement, and technical compliance with valuation principles set by both accounting and tax authorities.
At Westlock Partners, our approach combines quantitative rigour with commercial realism, producing valuations that withstand scrutiny from auditors, investors, and HMRC alike.
The three core valuation approaches
1. Income approach (Discounted Cash Flow - DCF)
The DCF method estimates value based on future cash flows, discounted to present value using an appropriate discount rate (typically the company’s weighted average cost of capital).
Key sensitivities include:
Revenue growth assumptions;
Terminal value methodology (perpetuity vs. exit multiple);
Discount rate selection (reflecting business risk and capital structure);
Treatment of tax reliefs and deferred tax effects.
DCF remains the most theoretically robust but also the most assumption-dependent, requiring transparency and careful justification.
2. Market approach (Multiples-based)
The market approach values a business by reference to comparable companies or transactions. In practice, it involves applying an EV/EBITDA or P/E multiple to normalised maintainable earnings. Adjustments are then made for differences in:
Growth prospects and market positioning;
Scale and customer concentration;
Balance sheet structure (cash/debt);
Control and liquidity (minority discounts or control premiums).
For many mid-market and owner-managed businesses, the market approach provides a pragmatic benchmark where detailed forecasts may not be available.
3. Asset-based approach (Net Asset Value - NAV)
Used primarily for property or investment companies, the NAV approach values equity as the fair market value of assets less liabilities. For trading businesses, this approach may serve as a floor value — particularly where tangible asset backing is significant.
Adjustments typically include revaluation of freehold property, goodwill impairment, and unrecorded liabilities (such as deferred tax or contingent exposures).
HMRC valuation principles
For tax purposes (e.g. share buybacks, EMI options, or probate valuations), HMRC typically expect valuations to follow the open market value standard under TCGA 1992 s272, the price a hypothetical purchaser would pay in a willing buyer–willing seller transaction.
Valuers must be prepared to defend:
Assumptions used in forecasts;
Chosen multiples and discount rates;
Application of discounts or premiums;
Consistency with contemporaneous financial information.
Documentation should clearly show the reasoning process, not just the conclusion, especially where valuation underpins a share transaction or clearance application.
Integrating valuation into strategic decision-making
A valuation is not just a number; it’s a lens through which to view strategic options. Robust valuation analysis informs:
M&A negotiation strategy;
Employee ownership and equity incentive design;
Shareholder buyouts and succession planning;
Capital structure and funding discussions.
When embedded into decision-making, valuation becomes a strategic management tool, not merely a compliance exercise.
The Technical Takeaway
Valuation sits at the intersection of finance, strategy, and judgement. By combining disciplined methodology with commercial insight, advisors can produce valuations that withstand scrutiny and support sound corporate decisions.