Generally, big corporations are publicly traded companies but there are some who want to chart the private path and grow on their terms. The advantages for such companies are many; they have no shareholders to report to and no stifling governmental rules hindering their growth. Before writing about the most valued private companies in the world, it is imperative that we define the valuation methods employed at rating such companies.
It is easy to arrive at a valuation of a publicly-traded company. We need to just multiply its stock price by its outstanding shares. But a valuation for private companies is a little more difficult. Private companies do not report their financials and are not listed on stock exchanges. They are also not governed by the stringent accounting rules that cover public limited companies.
Based on the available data, the market value of private companies can be determined based on three broad valuation methods.
Comparable Company Analysis or the relative value model
This is done by an analysis of the financials of a company in the same industry, and of a similar size. The value is determined based on data that is available publicly. Sometimes, a group of companies from the same industry, having the same profile, characteristics and size is taken and their multiples (cash flow, assets, performance, growth etc.) are used to arrive at an industry average. The multiples can vary but most analysis is based on the EBIDTA average (Earnings before interest, tax, depreciation and amortization).
The value then is determined by applying a formula of the ratio of the total price to earnings multiples of the comparable companies.
Another method used to determine valuation is the total assets value, where all the company’s assets are added up (based on a fair market value price) to get the intrinsic value. Intrinsic value is based only on the fundamentals of the company that is its cash flow, growth rate, and dividends. Another way to get the intrinsic value is on the past transaction values of similar companies or the said company to arrive at a fair figure.
The second method is the Discounted Cash Flow method
The discounted cash flow (DCF) method analyses the cash inflows and outflows generated by a company’s assets and investments to calculate its intrinsic value. In simple terms, it is the present value of future cash stream based on an interest rate as a discount factor. For example, if a company buys a warehouse, analysts take into account the outflow of cash, the expected inflow of cash based on the present purchase, and all the cash flow is finally calculated in the present value. A net present value (NPV) is determined for the transactions.
The third method is the Chicago Flow method
It is a combination of the multiple-based valuation and the DCF method. It uses multiples like cash flow, growth rate etc to arrive at the terminal value (terminal value refers to all future cash flows in an asset valuation) of a company, and the discount future cash flows to give the present valuation.
This method required taking into account the actual performance of the company based on three scenarios:
- The best case: company performance that exceeds expectations.
- The base case: the future performance of the company.
- The worst-case: when things go wrong and the company underperforms.
Under all these scenarios, a future cash flow scenario is projected for a determined period (mostly 5 to 7 years). Then the final year’s cash flows comparable multiples are used to project a terminal valuation for each scenario.
Here is a list of the world’s most valuable private companies.
The Minnesota-based company is valued at $27 billion and deals in agriculture products, finance, bio-industrial, and food and associated industries. It is the largest privately held corporation in terms of revenue in the U.S. It has a global presence in over 70 countries. It earns over a $103 billion in revenues annually.
Founded by William Cargill in 1865, the Cargill family owns 90 percent of the conglomerate.
Koch Industries is a Wichita, Kansas, based company. The multinational started as a petrochemical company in 1940 but now has expanded into polymers, energy, fertilizers, minerals, finance, and ranching.
It has companies spread over 60 nations and earns about $100 billion in annual revenue. Charles Koch owns a 42 percent stake in the company. David Koch’s widow, Julia Flesher Koch, and their children inherited 42 percent upon his passing in August 2019.”?
In Europe, IKEA, the Swedish furniture manufacturing company is a privately held company, though its structure is slightly complicated.
In 1982, the founder of the company, Ingvar Kamprad, created a charitable trust and turned over a major part of the company to it.
Stichting INGKA Foundation owns 90% of IKEA's stores. Another company based in Liechtenstein is owned by another foundation. This foundation has control over the intangible assets of the company. This kind of ownership structure saves IKEA millions of dollars in taxes.
It is a privately owned Dutch company with the majority holders being its employees. The company is based out of Geneva and Rotterdam and is into trading, distribution and logistics, complemented by shipping mining, power and retail. It has 40 offices globally. Its annual revenue is pegged at around $231 billion, making it the world’s largest privately held company.
The company is very private and very little information is shared with the general public about its holdings and business.