Value a private firm using methods based on the market and set out the pros and cons of each method
The idea
Market approaches use prices from other companies. The guideline public company method applies multiples of similar listed companies, adjusted for differences in size, growth and risk, and adds a control premium when a controlling interest is valued; the data are liquid and current, but comparability is often weak. The guideline transactions method uses multiples from acquisitions of whole companies, so control is already built in; data may be scarce, dated and inflated by synergies particular to certain buyers. The prior transaction method uses earlier trades in the subject company's own shares, most useful when recent and at arm's length. The trap is adding a control premium to a transaction multiple, which already reflects control.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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