fundamentalsofthefirms(includingsize,growth,risk,anda
measureofilliquidity).Theresultingregressioncanthenbe
used to estimate the multiple for a private business.
With both approaches, you are valuing a private firm by
lookingathowpubliclytradedfirmsarepriced.Totheextent
thatthesepublicly tradedfirms arepricedcorrectly bythe
market, the resulting valuation will be reasonable. If the
market is overpricing or underpricing the comparable
companies, youwillbuildtheover- orundervaluation into
your valuation as well.
ILLUSTRATION14.3: Estimating Illiquidity in a Relative
Valuation
ConsideragainthevaluationofKristinKandy.Wedefined
comparable firms to be publicly traded food processing
companies, with a marketcapless than$300 million.The
resultingsampleof 38 companiesisprovidedinthefollowing
table,withenterprisevalue-to-salesratios,operatingmargins,
and turnover ratios (trading volume/number of shares
outstanding):