Financial Accounting Blog

Tuesday, September 16, 2003

Valuation of Private vs. Public Firms

This is a well-reasoned article from It reinforces some of the classroom discussions about the differences between private and public companies. I really liked the second point "Profit Measurement" and the discussion about the goal of reporting for a public vs. private company. It is apropos to the Financial Accounting course.

While private companies seek mostly to minimize taxes, public companies seek to maximize earnings for shareholder reporting purposes. Therefore, the profitability of a private firm may require restatement in order for it to be directly comparable to that of a public firm. In addition, public-company multiples are generally calculated from net income (after taxes), while private-company multiples are often based on pre-tax (and many times, pre-debt) income. This discrepancy can result in an inaccurate formula for the valuation of a private company.