Michael A. Crain
It has been said that estimating the value of a private business is similar to analyzing securities of public companies. The theories are similar and not overly complex on the surface. There are even Web sites that say they can value a private firm. But like so many things in the business world, the devil is in the details. The valuation of a closely held business depends on many variables. While valuation theory does not seem overly complex, the accuracy is only as good as the variables that go into it. The valuation of private firms is often complicated by the quantity and quality of information and the way private firms are operated. Unlike public companies, private firms often do not have complete and accurate information available. Dollar for dollar, the time to value most profitable private firms is out of proportion to the analysis of public company securities. This is shown in the following case study, which illustrates valuation theory and types of information that are used.
For the past 20 years, Bob has owned and operated a manufacturing business that has grown significantly since it started. Bob is 60 years of age, and his children do not appear capable of taking over the company. He is thinking about the future of the firm at a time when he would like to slow down. One of his options is selling his business. Bob’s company, ...