Cost of Capital: Applications and Examples, + Website, 5th Edition

CHAPTER 24

The Private Company Discount for Operating Businesses

Introduction

Relationship between DLOM for Minority Interests and PCD

Quantifying the Private Company Discount

Koeplin et al. Study

Kooli et al. Study

Officer Study

Block Study

Paglia and Harjoto Study

De Franco et al. Study

Reasons for the Private Company Discount

Summary

INTRODUCTION

Discounting the expected net cash flows for a closely held business using an “as if public” cost of capital does not provide an estimate of the value of 100% of the closely held business. Even 100% of a closely held business suffers from a lack of liquidity.

In Chapter 22, we discussed discounts for lack of marketability for minority interests in non-publicly traded businesses. The empirical studies discussed therein provide data to help quantify the amount of such a discount in the case of minority interest transactions.

In this chapter, we discuss the appropriate discount for 100% of a private company compared to the value of a publicly traded equivalent company: the private company discount (PCD). The PCD is an entity level discount, applied to the value of the overall capital of the subject closely held business.

RELATIONSHIP BETWEEN DLOM FOR MINORITY INTERESTS AND PCD

The case for discounts for lack of liquidity for controlling interest transactions (100% interests) is not as clear as for minority interests. Even though the owner(s) of the controlling interest typically have no legal restrictions restricting their selling a closely ...