When appraisers or investment bankers value privately held companies by making comparisons to otherwise similar public companies, they typically apply a discount. Most practitioners attribute this discount mainly to the relative illiquidity of private companies; and, for this reason, they value private companies based on empirical studies designed to measure illiquidity discounts. But this assumption and the valuations based upon it are likely to be unreliable because private companies are valued differently than public companies owing to a variety of other, more “fundamental” factors that have caused the firm to stay private rather than choosing to list on an exchange. This article presents an alternative framework to estimate the discount for private companies that computes four separate valuation multiples for a set of private transactions and a comparable set of public transactions. After comparing these four sets of multiples for both domestic and foreign firms, the authors reach the following conclusions: ▪ Domestic private companies are acquired at an average 20–30% discount relative to similar public companies when using earnings (more precisely, EBIT and EBITDA) multiples as the basis for valuing the transactions. The average discount measured using price‐ to‐book value multiples are somewhat lower, and there are no significant differences between the revenue multiples of acquired private and public companies. ▪ The private company discounts are larger for foreign companies. Non‐U.S. private companies are acquired at an average discount of 40–50% relative to similar public companies when using earnings multiples to value the transactions. (However, the measured discount is not as statistically significant as for domestic companies be cause of the higher variation in the multiples of foreign companies, probably due to differences in accounting standards between countries.) Also, there are no statistically significant differences between the revenue multiples and the book value multiples of acquired foreign private and public companies.
Journal of Applied Corporate Finance – Wiley
Published: Jan 1, 2000
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