How to build a DCF for a private company
TL;DR
A private-company DCF uses the same free cash flow mechanics as any other DCF, but the discount rate is a private WACC (with size and illiquidity premia), and the terminal value uses an exit multiple grounded in precedent private transactions.
The steps
1. Free cash flow. Start with EBIT, tax it, add back D&A, subtract capex and change in working capital. Match the seasonality the business actually has.
2. Forecast. Five to seven years, tied to the operating model in the data room. Defend every assumption from a source in the room.
3. Private WACC. Start with CAPM using an unlevered industry beta from a peer set, relever at the target capital structure, then add a size premium and an illiquidity premium. Cost of debt reflects the actual credit facility, not the risk-free rate.
4. Terminal value. Prefer an exit multiple grounded in precedent private transactions (see the private comps guide). Cross-check with Gordon growth using a conservative long-term rate.
5. Sum and check. Discount each year plus terminal value. Terminal value should not dominate. Sensitivity table on WACC, exit multiple and growth.
The adjustments that matter
Size premium. Small companies carry more risk. Sourced from published private-market build-ups, not invented.
Illiquidity discount. LPs cannot sell tomorrow. IPEV valuation guidelines discuss the treatment. Common range varies by vintage and stage.
Control premium or minority discount. Applies when the stake being valued is different from the peer set.
How this shows up on the job
Every PE associate, growth investor and private credit analyst has to defend a private DCF. The arithmetic is table stakes. The judgement calls, private WACC, illiquidity, exit multiple, are what a Managing Director will grill you on.
How Reuben AI helps
Reuben AI's DCF shell starts from a private-company template with the size and illiquidity adjustments spelled out, and a provenance trail so every assumption traces back to the data room source.
Sources
Frequently asked questions
What long-term growth rate should I use?
Below long-run global GDP growth. Anything above 3 percent for a private company needs an explicit justification.
How do I pick beta for a private company?
Use an unlevered industry beta from a comparable peer set, then relever at the target's capital structure.
Exit multiple or Gordon growth for terminal value?
Exit multiple, grounded in precedent private transactions. Cross-check with Gordon growth.
Is DCF used in venture capital?
Rarely as the primary method. Comps and stage-based frameworks dominate. DCF matters more in growth, PE, private credit and infrastructure.
How do I size the illiquidity discount?
Reference published private-market build-ups and IPEV guidance. Document the exact source in the model.
Learn on the platform you will use on the job.
Start with the Free workspace to practise IC memos, LBOs, DCFs and private-capital workflows. Faculty, program leads and student investment club leaders can book a demo to discuss teaching seats and program access.