Handbook of Finance: Valuation, Financial Modeling, and Quantitative Tools

Chapter 35. The Valuation of Private Firms

STANLEY JAY FELDMAN, PhD

Chairman, Axiom Valuation Solutions and Associate Professor of Finance, Bentley University

Abstract: Although the metrics used to value private and public firms are the same, there are additional complexities and challenges an analyst faces when valuing private enterprises and their underlying securities. These include determining the standard of value, adjusting reported financial information for valuation purposes, choosing an appropriate valuation model, and calculating the firm's cost of capital. Additional complexity emerges when valuing controlling and minority interests and adjusting these values for lack of liquidity. The magnitude of these liquidity discounts is subject to a good deal of controversy.

Keywords: fair value, fair market value (FMV), cost of capital, equity cost of capital, debt cost of capital, weighted average cost of capital, cash flow, free cash flow, asset method, income method, market method, method of comparables, multiples, valuation, goodwill, assets, liabilities, liquidation value, intrinsic value, strategic value, control value, minority value, liquidity discount, marketability discount, equity, debt, derivatives, warrants, options

This chapter discusses the factors that determine the value of private firms. These factors include but are not limited to establishing the standard of value, choice of valuation model and developing a private firm's cost of capital. While many of the issues ...