Why Beta Is Sometimes Unavailable
Beta (β) measures how much a stock's price moves relative to the overall market. It is a straightforward data point for publicly traded companies — you can find it on Yahoo Finance, Bloomberg, or any financial data platform in seconds.
But for private companies, small businesses, startups, and owner-operated firms, beta simply does not exist. There are no publicly traded shares and therefore no price history to calculate a market sensitivity measure from. This creates a practical problem: the standard WACC formula requires a cost of equity, and the most common way to calculate cost of equity — the Capital Asset Pricing Model (CAPM) — requires beta.
Quick Recap: Where Beta Fits in WACC
The standard WACC formula is:
Beta appears only inside the cost of equity (Re) calculation via CAPM:
Where Rf is the risk-free rate and ERP is the equity risk premium. If you cannot observe beta, you need an alternative way to arrive at Re. The four methods below each solve this problem differently.
Method 1 — Use an Industry Beta (Most Common)
Industry / Comparable Beta from Damodaran Online
Professor Aswath Damodaran at NYU Stern publishes a free annual database of unlevered betas for over 90 industries. You find the industry closest to your company, take the unlevered beta for that industry, and then re-lever it to reflect your company's specific debt-to-equity ratio.
Step 1 — Find your industry beta: Go to pages.stern.nyu.edu/~adamodar → "Betas by Sector" → find your industry → note the Unlevered Beta.
Step 2 — Re-lever the beta to your company's capital structure using the Hamada equation:
Levered Beta = Unlevered Beta × (1 + (1 − Tax Rate) × (Debt / Equity))
Step 3 — Plug into CAPM to get Re, then use Re in the WACC formula normally.
Example: A private software company. Damodaran's software industry unlevered beta = 1.10. Company has $500K debt, $1M equity, 21% tax rate.
Levered Beta = 1.10 × (1 + (1 − 0.21) × (500 / 1000))
Levered Beta = 1.10 × (1 + 0.79 × 0.50)
Levered Beta = 1.10 × 1.395 = 1.53
Then: Re = 4.5% + 1.53 × 5.0% = 12.15%
Why this works: The industry beta reflects the real risk of operating in that business. Re-levering adjusts it to your specific financial risk. This is the standard approach used by investment bankers and M&A advisors when valuing private companies.
Method 2 — Build-Up Method (Most Practical for Small Business)
Build-Up Method — Add Risk Premiums Directly
Instead of using a single beta, the Build-Up Method constructs the cost of equity by adding individual risk premiums on top of the risk-free rate. Each premium reflects a specific source of risk for your business.
Where:
- Rf = Risk-free rate (10-year US Treasury, currently ~4.3–4.5%)
- ERP = Equity risk premium (~5.0% for US market, from Damodaran)
- Size Premium = 1–8% depending on company size (Duff & Phelps data)
- Illiquidity Premium = 2–5% for private companies (shares cannot be sold easily)
- Company-Specific Risk = 0–5% for key-person dependency, customer concentration, limited history
Example — Small manufacturing business:
Re = 18.5%
This 18.5% cost of equity is realistic for a small private business. You then plug it straight into the WACC formula with your cost of debt and capital structure weights — no beta needed at any point.
Why this works: The Build-Up Method is explicitly designed for private companies where beta cannot be observed. It is widely accepted in business valuation, litigation support, and M&A transactions. Our Private Company WACC Calculator uses this exact approach.
Method 3 — Use Comparable Public Companies (Peer Comparables)
Peer Comparable Beta — Average of Similar Listed Companies
Find 3–5 publicly traded companies that closely match your business in terms of size, industry, geography, and business model. Calculate the average unlevered beta of those comparables, then re-lever it to your own capital structure.
Step 1: Identify your peer group (3–5 publicly traded companies most similar to yours).
Step 2: Find each peer's levered beta (from Yahoo Finance, Bloomberg, etc.).
Step 3: Unlever each peer's beta to remove the effect of their capital structure:
Unlevered Beta = Levered Beta / (1 + (1 − Tax Rate) × (Debt / Equity))
Step 4: Average the unlevered betas across your peer group.
Step 5: Re-lever using your company's own Debt/Equity ratio (same Hamada formula as Method 1).
Step 6: Use the re-levered beta in CAPM to get Re, then proceed with WACC normally.
Why this works: This is the most rigorous approach for mid-market private companies where a clear set of public peers exists. It is the method commonly used in formal business valuations and fairness opinions.
Method 4 — Accounting Beta (Return on Assets Approach)
Accounting Beta — Derived from Financial Statement Data
If you have several years of financial statements (at least 3–5 years), you can estimate an accounting beta by comparing how your company's Return on Assets (ROA) has moved relative to the average ROA of the market or your industry over the same period.
Run a simple regression of your annual ROA changes against average industry ROA changes. The slope of the regression line is your accounting beta.
This is a more complex and less commonly used approach, but it can be useful when:
- No close public comparables exist
- The company is in a niche industry not covered by Damodaran's sector betas
- A formal valuation requires a company-specific risk measure rather than an industry average
Complete Worked Example — Private Company WACC Without Beta
Let us walk through a complete WACC calculation for a private company using Method 1 (Industry Beta) and Method 2 (Build-Up), so you can see both approaches side by side.
Company profile: Private healthcare services business, $3M revenue, $800K debt, $1.6M estimated equity value, 21% tax rate, 7% cost of debt.
| Input | Method 1 — Industry Beta | Method 2 — Build-Up |
|---|---|---|
| Risk-Free Rate (Rf) | 4.5% | 4.5% |
| Equity Risk Premium | 5.0% | 5.0% |
| Beta (β) | 1.38 (re-levered) | Not used |
| Size Premium | Not used separately | 4.5% |
| Illiquidity Premium | Add 3% manually | 3.0% |
| Company-Specific Risk | Not used | 2.0% |
| Cost of Equity (Re) | 4.5% + 1.38×5% + 3% = 14.4% | 4.5+5+4.5+3+2 = 19.0% |
| Equity Weight (E/V) | 66.7% (1,600/2,400) | 66.7% |
| Debt Weight (D/V) | 33.3% (800/2,400) | 33.3% |
| After-Tax Cost of Debt | 7% × (1−21%) = 5.53% | 5.53% |
| WACC Result | 11.44% | 14.49% |
The range of 11–15% for this type of private healthcare business is consistent with typical real-world valuations. The Build-Up method gives a higher figure because it explicitly accounts for illiquidity and company-specific risks that the industry beta alone does not capture. In practice, valuators often average or bracket the two results.
Which Method Should You Use?
| Your Situation | Recommended Method |
|---|---|
| Private company, any industry | Method 1 (Industry Beta from Damodaran) — quickest and most widely accepted |
| Small business or owner-operated firm | Method 2 (Build-Up) — most practical, fully accounts for private company risks |
| Mid-market company with clear public peers | Method 3 (Comparable Companies) — most rigorous for formal valuations |
| Niche business, 5+ years of financials | Method 4 (Accounting Beta) — as a cross-check only |
| Any private company — best practice | Use Method 1 or 2 as primary + the other as a cross-check |
Calculate Private Company WACC Now
Our Private Company WACC Calculator uses the Build-Up Method — no beta required. Enter your risk-free rate, equity risk premium, and three private company premiums to get your adjusted cost of equity and full WACC instantly: