Issues in Valuation of Privately Held Firms

Abstract

We examine how Danish investors and corporate financial advisers apply present value approaches in valuing privately held companies. We interview 39 corporate advisers and private equity investors who apply present value approaches as a valuation tool for privately held firms. Our findings indicate that many of the participants comply with the recommendations outlined in the valuation literature. However, the findings also indicate that some practitioners apply the present value approaches incorrectly. Our research also confirms that valuation of privately held firms involves a great deal of judgement, especially if the literature does not provide clear cut answers. For example, estimating the marketability discount and control premium often involve guesstimate among the participants. Further, several participants argue that the literature in some cases is inadequate. For example, some argue that beta estimates from peers are imprecise and contain severe measurement problems.