assetsareliquidandcanbesoldwithnosignificantlossin
value.Aprivatefirmwithsignificantholdings ofcashand
marketablesecuritiesshouldhavealowerilliquiditydiscount
thanone with factoriesor otherassetsfor whichthere are
relatively few buyers.
2.Financialhealthandcashflowsofthefirm.Aprivatefirm
thatisfinanciallyhealthyshouldbeeasiertosellthanonethat
isnothealthy.Inparticular,afirmwithstrongearningsand
positivecashflowsshouldbesubjecttoasmallerilliquidity
discount than one with losses and negative cash flows.
3.Possibilityofgoingpublicinthefuture.Thegreaterthe
likelihoodthataprivatefirmcangopublicinthefuture,the
lowershouldbetheilliquiditydiscountattachedtoitsvalue.
In effect, theprobability of going public is built into the
valuationof theprivate firm.To illustrate,theowner ofa
privatee-commercefirmin 1998 or 1999 wouldnothavehad
toapplymuchofanilliquiditydiscountifany,tohisfirm’s
value,becauseof theeasewith whichthefirmcouldhave
been taken public in those years.
4.Sizeofthefirm.Ifwestatetheilliquidity discountasa
percentofthevalueofthefirm,itshouldbecomesmalleras
thesizeofthefirmincreases.Inotherwords,theilliquidity
discount shouldbe smaller as a percent of firm value for
private firms like Cargill and Koch Industries, which are
worthbillionsofdollars,thanitshouldbeforasmallfirm
worth $5 million.
5.Controlcomponent.Investinginaprivatefirmisdecidedly
more attractivewhen you acquire a controlling stakewith
yourinvestment.Areasonableargumentcanbemadethata