A New Examination of the Private Company Discount

Abstract

Determining the appropriate discount for lack of marketability (DLM) is one of the most challenging questions in valuing private firms, and one that has only recently begun to be deeply explored. In this study, using several multiples with a methodology robust to the criticisms addressed to the acquisition approach, we find that privately-acquired firms are indeed discounted. The median DLM observed, however, varies with the multiple considered. For example, we find that the estimated median private company discount is 34% with the earnings multiple, whereas it is 20% for the cash-flow multiple. Furthermore, we find that the estimated DLM varies across firms and some industries, and tends to be smaller for large and growth private companies, but is more sensitive to growth than to size.