Private Company Valuation

Question 0

Different characteristics of private companies (compared to public)

Answer 0

Less liquidity
More restrictions on marketability
More concentrated equity ownership

Question 1

Specific factors influencing value of privately traded firms

Answer 1

Stage of life cycle 
Firm size 
Influence of short term investors 
Quality/depth of management 
Management/ shareholder overlap 
Quality of financial info 
Taxes

Question 2

Three reasons for valuing a private company:

Answer 2

Transaction related
Compliance related
Litigation related

Question 3

Types of transaction related valuation reasons

Answer 3

Venture capital financing 
IPO
Sale (acquisition)
Bankruptcy 
Managerial comp (performance based)

Question 4

Reasons for compliance related valuations

Answer 4

Legal
Regulatory
Focused on financial reporting/tax issues

Question 5

Litigation related valuations

Answer 5

Shareholder suits
Damage claims
Lost profit claims
Divorce settlements

Question 6

List six types of valuation methods for private companies

Answer 6

Fair market value 
Fair value for financial reporting 
Fair value for litigation 
Market value 
Investment value 
Intrinsic value

Question 7

Three approaches to private company valuation

Answer 7

Income approach (PV of future income)
Market approach (price multiples)
Asset based approach (assets less liabilities)

Question 8

How to estimate normalized earnings

Answer 8

Exclude non recurring and unusual items

Adjust discretionary/tax motivated expenses, excessive comp, company owned real estate, Etc

Question 9

Difference between strategic and non strategic (financial) buyer

Answer 9

Strategic: part of firm value based on perceived synergies of target
Financial: no synergies - dissimilar industry

Question 10

Difficulties with estimating discount rate in small firm

Answer 10

Size premium (biased up, distress)
Availability /cost of debt (>WACC)
Acquirer vs. target (acquirer lower r)
Protection risk (less info) 
Inexperienced mgt (high/low forecasts)
Lifecycle stage (early)

Question 11

CAPM limitations include:

Answer 11

Beta estimated from public data (not appropriate)

Expanded CAPM / build up - add premiums for size/ unsystematic risk/ industry factors/ company factors

Question 12

What are three market approaches to PE valuation

Answer 12

Guideline public company method
Guideline transactions method
Prior transactions method

Question 13

How do control and marketability factor in

Answer 13

Controlling equity more valuable than minority

More liquidity is more valuable