WHAT MAKES PRIVATE FIRMS DIFFERENT?

There are a number of common characteristics shared by private firms with publicly traded firms, but there are four significant differences that can affect how we estimate inputs for valuation.

1. Publicly traded firms are governed by a set of accounting standards that allow us not only to identify what each item in a financial statement includes but also to compare earnings across firms. Private firms, especially if they are not incorporated, operate under far looser standards, and there can be wide differences between firms on how items are accounted for.
2. There is far less information about private firms in terms of both the number of years of data that is typically available and, more importantly, the amount of information available each year. For instance, publicly traded firms have to break down operations by business segments in their filings with the SEC and provide information on revenues and earnings by segment. Private firms do not have to provide this information, and usually do not.