Our investment banker is using public guideline company transactions to justify an inflated valuation multiple, but we are a closely held business. How do we apply realistic size and marketability discounts to these public comps to establish a defensible valuation that strategic buyers will actually take seriously?

Question

Tyler Smith · Accepted Answer

Investment bankers love to pitch astronomical valuation multiples based on public guideline company transactions. While these comps look great in a pitch deck, they are highly misleading for lower middle-market businesses. Public companies enjoy unlimited liquidity, massive scale, and diversified customer bases, which is why they command double-digit multiples. Applying those same multiples to a private company is unrealistic and will destroy your credibility with buyers.

To build a defensible valuation, you must apply size and marketability discounts to those public benchmarks. A typical private business will face a liquidity discount of twenty to thirty percent, plus an additional discount for smaller scale and customer concentration risks. This brings the theoretical public multiple down to a realistic, market-clearing private multiple.

Use your quarterly planning sessions to review your Business Integrity Review and identify the specific operational risks that impact your multiple. By proactively adjusting public comps for your actual size and marketability, you establish a valuation range that is grounded in reality. This allows you to enter negotiations with confidence, rather than setting an unrealistic price expectation that scares off serious buyers and leaves your company languishing on the market.