Set out why private businesses are valued and what financial analysts should concentrate on
The idea
Private business valuations serve three broad purposes. Transaction-related valuations support venture capital financing, initial public offerings, acquisitions and reorganisations in bankruptcy. Compliance-related valuations meet financial reporting requirements, such as goodwill impairment tests, and tax requirements, such as estate and gift tax. Litigation-related valuations support damages claims, shareholder disputes and divorce settlements. The analyst must identify the definition of value that applies, since fair market value, fair value for reporting, investment value and intrinsic value can differ. Key areas of focus include the stage of the business, the reliability of management's forecasts and the size of the interest being valued. The trap is using a strategic buyer's investment value for a tax filing that calls for fair market value.
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- Contrast the key features of private and public companies that matter for valuation
- Explain the difficulties of estimating cash flow for private firms and the adjustments needed to arrive at normalised earnings
- Explain what has to be adjusted when setting the discount rate for a private firm
- Contrast the models for estimating the return required on private company equity, such as the build-up approach, the CAPM and the expanded CAPM
- Explain and assess how control and marketability discounts and premiums change the value of a private company
- Explain the asset-based, market and income ways of valuing a private firm and what bears on choosing each one
- Value a private firm using methods based on income
- Value a private firm using methods based on the market and set out the pros and cons of each method