How to Do a Detailed Financial Analysis for a Non-Public Company (Step-by-Step Guide)

Unlike public companies, private businesses don’t file 10-Ks, 10-Qs, or investor decks—so a solid financial analysis requires more digging, forensic thinking, and structured modeling. Whether you’re an investor, acquirer, lender, or internal operator, this guide walks through a professional-grade, step-by-step framework for analyzing a privately held business.

1. Start With Core Financial Statements

For a meaningful analysis, collect at least three full fiscal years of:

• Income Statements (P&L)

• Balance Sheets

• Statements of Cash Flows (often missing in small firms—you may need to reconstruct these manually)

• Tax Returns (Form 1120, 1065, or Schedule C) to reconcile against books

• Internal management reports (monthly or quarterly if available)

👉 If you’re evaluating a small or closely held business, also get owner add-backs and discretionary expenses (e.g., personal vehicles, family payroll, one-time legal costs) to normalize earnings.

2. Normalize and Reconstruct the Financials

Private company books are often messy. Before analysis, you need to standardize the data.

a. Align accounting methods

• Convert cash basis to accrual, especially for revenue, AR/AP, and prepaid/deferrals.

• Identify any seasonality (e.g., construction, hospitality, education).

b. Adjust for non-recurring items

Examples:

• One-time lawsuit settlements

• PPP loan forgiveness (non-operating)

• Unusual asset sales

c. Owner adjustments

Remove:

• Personal auto or travel

• Family member “ghost payroll”

• Excess owner salary (normalize to market comp)

d. Rebuild the Statement of Cash Flows

If not provided:

• Start with Net Income → add back non-cash charges (depreciation, amortization) → adjust for working capital changes → include investing & financing cash flows (e.g., loan proceeds, equipment purchases, distributions).

3. Perform Vertical & Horizontal Analysis

This reveals structure and trends at a glance.

Vertical analysis (common size)

• Income Statement → express each line as % of revenue.

• Balance Sheet → express as % of total assets.

This shows cost structure, margin stability, and capital composition across years.

Horizontal analysis

• Year-over-year % changes for every major line.

• Spot revenue growth trends, expense creep, and shifts in working capital.

👉 Red flag: declining gross margin with rising SG&A = margin compression.

4. Ratio Analysis (Key Metrics)

Profitability

• Gross Margin = Gross Profit ÷ Revenue

• EBITDA Margin = EBITDA ÷ Revenue

• Net Margin = Net Income ÷ Revenue

• Return on Assets (ROA) = Net Income ÷ Average Total Assets

• Return on Equity (ROE) = Net Income ÷ Average Equity

Liquidity

• Current Ratio = Current Assets ÷ Current Liabilities

• Quick Ratio = (Cash + AR) ÷ Current Liabilities

Leverage

• Debt / Equity

• Debt / EBITDA

• Interest Coverage = EBIT ÷ Interest Expense

Efficiency

• AR Days = (Accounts Receivable ÷ Revenue) × 365

• Inventory Days = (Inventory ÷ COGS) × 365

• AP Days = (Accounts Payable ÷ COGS) × 365

• Cash Conversion Cycle = AR Days + Inventory Days – AP Days

👉 For small businesses, watch for owner draws/distributions, which can distort leverage and liquidity ratios if not properly reclassified.

5. Assess Revenue Quality and Concentration

• Customer Concentration: Top 3–5 customers as % of total revenue. Anything >25% from one customer is a material risk.

• Recurring vs Project Revenue: Subscription, service contracts, vs one-off sales.

• Retention Rates: Churn vs renewal (where applicable).

• Pipeline Health: If available, look at booked but not billed work (esp. in contracting and SaaS).

6. Cost Structure & Operating Leverage

• Break down COGS vs SG&A over time.

• Identify fixed vs variable costs to understand operating leverage—how profits scale with revenue.

• Benchmark margins to industry peers (using NAICS codes + databases like RMA, IBISWorld, or public comps).

👉 In contracting / service firms, labor utilization is a critical metric. In manufacturing, gross margin stability often reveals pricing power vs cost inflation.

7. Working Capital & Cash Flow Dynamics

Non-public companies live or die on cash timing.

• Track working capital as % of revenue over time.

• Analyze seasonal swings in AR, AP, and inventory.

• Stress-test scenarios: What happens if AR collection stretches by 15 days?

Free Cash Flow (FCF) = EBITDA – Capex – ∆ Working Capital – Taxes + Non-cash adjustments

This is the true cash the business generates, critical for valuation, debt service, and distributions.

8. Debt, Leases, and Off-Balance Sheet Items

Many private companies hide obligations in:

• Operating leases (before ASC 842 adoption)

• Related-party loans

• Owner guarantees

• Balloon loans or renewals not fully amortizing

Reconcile loan schedules to balance sheet. Identify maturity walls and covenant risks.

9. Forecasting and Sensitivity Analysis

Once historicals are clean:

1. Project Revenue — based on historical CAGR, backlog, or driver-based models (e.g., units × price).

2. Project Costs — use historical % of revenue or driver assumptions.

3. Model Working Capital — maintain or adjust AR/AP days assumptions.

4. Include Capex and Debt Service — for realistic FCF forecasts.

Run scenarios:

• Base case

• Downside (e.g., -10% revenue, slower collections)

• Upside (new contract wins, margin expansion)

10. Valuation Framework (Optional but Powerful)

For acquisitions or investment analysis, pair the financial analysis with valuation methods:

• DCF (Discounted Cash Flow) → FCF forecast × discount rate + terminal value

• Market Multiples → EBITDA × industry multiple (from comparable transactions or public comps, adjusted downward for private illiquidity)

• Asset-based → Fair market value of assets – liabilities (common for distressed firms or real estate-heavy entities)

11. Qualitative Context Matters

Numbers alone can mislead. Layer in:

• Management quality & succession

• Customer contracts (length, assignability)

• Competitive position in the local or niche market

• Regulatory or key-person risks

• IT systems & reporting reliability

12. Build a Clean Summary Package

Your deliverable should be structured like a professional memo:

• Executive Summary – Key findings and risks

• Financial Dashboard – Historical & projected KPIs, charts, tables

• Supporting Schedules – Adjustments, customer concentration, working capital breakdown

• Scenario Tables – Sensitivity on EBITDA, FCF, valuation

This is the package you’d hand to a lender, investor, or buyer to make an informed decision.

✅ Pro Tip:

For small to mid-sized private companies, the biggest value creation is in clean financials. Simply normalizing, standardizing, and forecasting professionally can unlock financing, valuation premiums, or sale readiness.