Do Values of Privately Held Companies Correlate with Values of Public Companies?
Values of privately held enterprises are generally not comparable to publicly held enterprises for at least two distinct reasons. One: There is not a ready market of investors to buy stock in a private company. As such, in the value determination the valuator oftentimes deducts a “Lack of Marketability Discount” from the company value determined to adjust for the cost required to take a company public and/or sell the business through a broker. Two: Most privately held companies are much smaller in size than public companies. This increases the risk of ownership, or investment, in the enterprise. Consequently, the expected rates of return used by an investor, or prospective owner, to value a privately held business are typically higher than returns anticipated with ownership in a public company. Can I Really Expect to Receive Much Value out of My Company When I Retire? Historically, owners of private companies have looked to cash flows and tangible assets for company value, with little
