In plain English
Most companies are not listed, so there is no share price to anchor on. You value them with the same tools, then adjust for the things a private owner cannot do: sell quickly, diversify, or rely on audited public disclosure. And if the business keeps earning less than its cost of capital, the question stops being what it is worth and becomes who gets paid.
The advanced view
Private valuation is public valuation plus explicit adjustments for marketability, control and size, applied in the right order and never double-counted. Restructuring is the same enterprise-value question resolved against the capital structure: value flows down the waterfall until it runs out, and the fulcrum security is where ownership changes hands.
Three approaches, and a serious valuation uses at least two. The income approach discounts cash flows, with a cost of equity built up rather than read off a beta. The market approach applies multiples from listed peers or private transactions, adjusted for size and liquidity. The asset approach values net assets at fair value and sets the floor — the number below which an owner would rather liquidate.
Build-up and adjustments
Build-up cost of equity = Risk-free + ERP + Size premium + Industry premium + Company-specific risk DLOM (discount for lack of marketability): typically 10-30% on a minority interest Control premium ≈ 1/(1 − minority discount) − 1; minority discount = 1 − 1/(1 + control premium) Value of controlling, marketable interest → less DLOM → controlling, non-marketable Normalised EBITDA = Reported ± owner compensation, related-party rent, non-recurring items Equity waterfall: EV → secured debt → unsecured debt → preferred → equity
Order of operations matters. Start from a marketable, minority basis if you used trading comps, add a control premium if you are valuing a controlling stake, then apply the marketability discount last, because it reflects the time and cost of exit for whatever interest you hold. Applying a control premium and no marketability discount, or both to the same base, is the most common error in private valuation reports.
Worked example: valuing a family-owned manufacturer
Step 1 of 10
- 1Reported EBITDA 12.0; owner takes 2.5 salary versus a 1.0 market rate → add back 1.5
Now the distressed case. When ROIC sits below WACC for long enough, the enterprise is worth less than its debt and the capital structure has to be rewritten. Out-of-court workouts — amend-and-extend, covenant waivers, debt-for-equity swaps — are faster and cheaper but need near-unanimous creditor consent. Formal processes (Chapter 11 in the US, företagsrekonstruktion in Sweden) impose a stay on creditors, allow DIP or super-priority financing that jumps the queue, and can bind dissenting classes through a cram-down.
Restructuring vocabulary in practice
Fulcrum security
The class where enterprise value runs out. It converts to equity in a restructuring, so it is the class that ends up owning the business.
DIP financing
New money lent during a formal process with super-priority. Expensive, but it is the only money available.
Creditor hierarchy
Super-priority, secured, unsecured, subordinated, preferred, common. Absolute priority means a junior class gets nothing until senior is whole.
Amend and extend
Push maturities out and loosen covenants in exchange for fees and a higher margin. Buys time if the problem is liquidity, not solvency.
Debt-for-equity swap
Creditors take shares instead of cash, deleveraging the business and wiping out most existing equity.
Liquidation versus going concern
Compare going-concern EV to liquidation value net of costs. Restructure only when the business is worth more alive.
Must know cold
- ✓Liquidity crisis and solvency crisis need different cures: financing versus a write-down.
- ✓Control premium and minority discount are two views of the same number.
- ✓Apply DLOM last, and never alongside a discount already embedded in the multiple.
- ✓Normalise owner compensation and related-party items before applying any multiple.
- ✓Absolute priority: value flows top-down and stops; equity is a residual, often zero.
- ✓The fulcrum security owns the company after the restructuring.
Common pitfalls
- ×Applying a public multiple to a private company without size, liquidity or key-person adjustments.
- ×Double-counting risk in both the discount rate and the cash flows.
- ×Ignoring the tax and structuring difference between a share deal and an asset deal.
- ×Valuing the equity of a distressed company as if it still had upside without checking the waterfall.
- ×Assuming a covenant waiver is free; it costs fees, margin and usually collateral.
Essential vocabulary
- DLOM
- Discount for lack of marketability, reflecting the time and cost of selling an unlisted interest.
- Size premium
- Extra required return for small companies, observed empirically and used in build-up models.
- Key-person risk
- Dependence on an owner or founder; handled with a company-specific risk premium or an earn-out.
- Cram-down
- Court confirmation of a plan over a dissenting class's objection.
- Företagsrekonstruktion
- Swedish court-supervised reorganisation: a stay on enforcement while a composition with creditors is agreed.
Strategy connection
Persistent ROIC below WACC is a strategy verdict before it is a finance problem. Restructuring buys the time to fix the competitive position; it does not create one. Any turnaround plan that only rewrites the balance sheet reappears as the same restructuring three years later.
Exercises
Try each one on paper before revealing the worked solution.
Exercise 1
Enterprise value is 700. Debt: 400 secured, 250 unsecured, 100 subordinated, plus 50 of preferred. Where is the fulcrum, and what does each class recover?
Exercise 2
A minority discount of 20% is observed in a market. What control premium does that imply, and why do the two differ numerically?
Exercise 3
Structuring exercise: a founder wants to sell 30% of her company to fund growth and asks what it is worth. Structure the answer.