Mergers, Acquisitions, and Corporate Restructurings

By Patrick A. Gaughan | Go to book overview

14
VALUATION OF PRIVATELY HELD
BUSINESSES

Of the myriad methods employed in business valuation, some are more appropriate to public firms and others to privately held concerns. Public companies often tend to be larger than privately held firms, a factor that greatly influences the method chosen. This chapter discusses the differences in the valuation methods used for public and privately held firms, followed by techniques used in private business valuation.

The analyst of a privately held firm often faces a more difficult task in valuing a business, given the general lack of data for private firms and the broadly circulated opinions that exist for public companies. A wide range of securities analysts often study public firms to determine the investment value of a firm's equity. The company reports of public firms are readily available. In addition, the various financial media publish a regular supply of articles about public firms. The analyst of a private firm, however, lacks the luxury of access to these information sources and must rely on more original sources.

The academic world places great emphasis on teaching the traditional methods of financial analysis as they apply to the large Fortune 500 public firms, but they often ignore the methods that are unique to valuing privately held concerns. These methods are found in only a small collection of specialized books that are designed for the practitioner in the field of valuation.1 This chapter is designed to provide an overview of the valuation of closely held businesses. The reader may acquire a more detailed coverage of this topic through the various professional publications that are listed at the end of this chapter.


DIFFERENCES IN VALUATION OF PUBLIC AND PRIVATE BUSINESSES

A major difference between public and private business valuations centers on the availability and reliability of financial data.2 Some of these differences are caused by the efforts

1. See, for example, Shannon Pratt, Robert F. Rielly, and Robert P. Schweihs, Valuing a Business,
3rd ed. (Chicago: Richard D. Irwin, 1996); Jay Fishman, Shannon Pratt, J. Clifford Griffith, and D.
Keith Wilson, Guide to Business Valuations, 5th ed. (Fort Worth: Practitioners Publishing Co.,
1995); and Robert Trout, “Reference Guide to Valuing a Closely Held Business,” in Expert Eco-
nomic Testimony: Reference Guides for Judges and Attorneys (Tucson: Lawyers and Judges Pub-
lishing Company, 1998), pp. 155–220.

2. This section is drawn from Patrick A. Gaughan and Henry Fuentes, “Taxable Income and Lost
Profits Litigation,” Journal of Forensic Economics IV, no. 1 (Winter 1990), pp. 55–64.

-557-

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