What type of adjustment might be necessary when using public company comparisons for a private company's valuation?

When valuing a private company using public company comparisons, one essential adjustment typically involves liquidity. Public companies generally have more liquid shares, meaning their stock can be bought or sold more easily on the open market, which is reflected in their valuations. In contrast, private companies do not have the same level of liquidity, as their shares are not traded on public exchanges.

Due to this difference, it's common to apply minor adjustments to the valuation of a private company to account for the liquidity discount, recognizing that investors would require a discount for the lack of marketability and liquidity of private company shares. This method helps align the valuation of the private entity more closely with what investors would likely assess in light of their reduced ability to sell their investment quickly or at comparable values to those of public companies.

Other options, while relevant in certain contexts, do not directly address the fundamental valuation concern raised by the comparison of public and private companies in terms of liquidity. For instance, growth potential or demand fluctuations may affect valuations but are not primary adjustments specifically related to the inherent characteristics of the companies being compared.