Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, Third Edition

CHAPTER 24

Valuing Private Firms

So far this book has concentrated on the valuation of publicly traded firms. In this chapter, we turn our attention to the thousands of firms that are private businesses. These businesses range in size from small family businesses to some that rival large publicly traded firms in revenues and profitability. The principles of valuation remain the same, but there are estimation problems that are unique to private businesses. The information available for valuation tends to be much more limited in terms of both history and depth, since private firms are often not governed by the standardized accounting and reporting standards of publicly traded firms. In addition, the standard techniques for estimating risk parameters such as beta and standard deviation require market prices for equity, an input that is lacking for private firms.

When valuing private firms, the motive for the valuation matters and can affect the value. In particular, the value that is attached to a publicly traded firm may be different when it is being valued for sale to an individual, for sale to a publicly traded firm, or for an initial public offering. In particular, whether there should be a discount on value for illiquidity and nondiversifiable risk or a premium for control will depend on the motive for the valuation. Each of these components will be considered over the course of this chapter.

WHAT MAKES PRIVATE FIRMS DIFFERENT?

There are a number of common characteristics shared ...