THE PRIVATE COMPANY DISCOUNT

THE PRIVATE COMPANY DISCOUNT 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Corporate Finance Wiley

Loading next page...
 
/lp/wiley/the-private-company-discount-3UnxOZ0Js8
Publisher
Wiley
Copyright
Copyright © 2000 Wiley Subscription Services, Inc., A Wiley Company
ISSN
1078-1196
eISSN
1745-6622
D.O.I.
10.1111/j.1745-6622.2000.tb00022.x
Publisher site
See Article on Publisher Site

Abstract

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

Journal of Applied Corporate FinanceWiley

Published: Jan 1, 2000

There are no references for this article.

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create folders to
organize your research

Export folders, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off