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Valuation best practices for private equity firms

April 6, 2014
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Whether being used for performance data or to win deals, valuations that private equity firms develop should be supported by a methodology that is:

• Robust

• Consistent, and

• Transparent

Robust. Valuations are most accurate (and defensible) when they are developed through a robust process. As the International Private Equity and Venture Capital (IPEV) Guidelines for valuation notes, valuers should exercise judgment, applying “a technique or techniques that is/are appropriate in light of the nature, facts and circumstances of the Investment in the context of the total Investment portfolio and should use reasonable current market data and inputs combined with Market Participant assumptions.”

Those guidelines were aimed at helping firms develop estimates determined in compliance with applicable fair value accounting standards, which stated that valuation techniques “consistent with the market approach, income approach and/or cost approach shall be used to measure fair value.”

Effective methodologies allow for adjustments to financials, including normalizing, and projections, so using a tool that is customizable can help in this regard. A robust process also includes industry and economic analyses that are appropriate for the private company. This means having comparable data that is reliable and credible for the relevant industry and a relevant timeframe.

Private-equity firms evaluating a business for the purpose of better understanding current and future value may also benefit from having the flexibility to evaluate companies using multiple approaches before determining the most suitable technique.

For example, private equity firms in Pepperdine’s recent survey use various methods when valuing privately held businesses.  Some automated valuation tools provide flexibility that accommodates numerous methods.

Consistent. “PE firms are constantly having to update the values of their firms, and doing it in a consistent way is important,” says Thomas Bryant, a consultant with Sageworks Valuation Solution, a commercial-grade, web-based platform for valuing private companies. “While firms may often use discretion to determine which valuation method and approach is best, they need to be able to track the route they took. This is especially important for larger firms, where you have multiple people working on valuations.”

A side benefit of a consistent, streamlined process is efficiency. Staff time is shifted from routine but complex calculations to more value-added services. A web-based system that allows access by multiple parties promotes communication and collaboration within the firm.

Transparent. Superior valuation methodologies are clearly spelled out to stakeholders. “A strong differentiating factor for a PE firm is communicating a clear process for arriving at a value” for their assets, says Bryant. “Someone should be able to take the valuation report and recreate the value you got based on the stated methodology and the documentation included in the report.” 

This transparency is shown by thorough documentation of the valuation methodology routinely used in calculations, and by documentation of variations from the standard methodology, along with detailed explanations for each variation.

Valuation tools that incorporate standardized reports and notes embedded during the calculation process assist in transparency efforts. They can also be used to help convince prospective acquisition targets or prospective buyers of the accuracy of the private-equity firm’s valuation during negotiations. Transparency is critical to investors, deal parties and increasingly, regulators.

Developing valuation methodologies that are robust, consistent and transparent can go a long way toward meeting head-on the competition for deals and for investors that private equity firms are facing.

To find out more about this topic, read this complimentary whitepaper on Best Practices for Valuations and Implications for Private Equity.



Sageworks Valuation Solution
Sageworks Valuation Solution is a web-based, business valuation solution that helps firms streamline workflow, scale existing processes and increase realization rates. Explore features and benefits by watching a one-minute walkthrough video.

About the Author


Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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