discount. If we increase discount rates for illiquidity in
perpetuity ratherthan the fiveyears that we used in both
calculations, the resulting discounts will be much larger
(31.77%forthe4%illiquiditypremiumand17.66%forthe
2% illiquidity premium).
Relative Valuation
Thevaluationadjustmentsthatwehavetalkedaboutsofar
are structured around intrinsic valuation, where we try to
estimatethevalueofabusinessbasedonitscashflowsanda
risk-adjusted discount rate. In practice, most valuations of
both private and publicly traded companies are relative
valuations,wherewevaluebusinessesbasedonhowsimilar
assetsarepriced.In thissection,we considertwo waysof
incorporating illiquidity into relative valuation.
Relative Valuation with Illiquid Assets
The simplest way of incorporating illiquidity into relative
valuationistovalueacompanybasedonthepricingofother
companies of similar liquidity (or illiquidity). The key to
usingthisapproachisinfindingthesecomparablecompanies.
Koeplin,Sarin,andShapiro(2000)provideanillustrationof
thisapproachbycomparingthemultiplespaidfor 84 private
companies thatwere acquisitiontargets tothemultiples of
earningspaidfor 198 “similar”publiclytradedfirmsbetween
1984 and 1998.
79 Figure14.8showstheaveragemultiplesofearnings,book
value, and sales for private and public firms.
FIGURE 14.8Private versus Public Acquisitions