Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

andearnings.Notwithstandingtheselimitations,youdosee
relative valuation widely used in some areas of private
business valuations (restaurant franchises and medical
practices,forinstance),withrulesofthumbonmultiplesof
revenuesandearningsusedtodetermineestimatedvalues.In
fact,transactions data onprivate businessesis nowwidely
available from sources such as the Institute of Business
Appraisers (IBA), BIZCOMPS, and Pratt’s Stats.

Relative Valuation with Illiquidity Discount

Inmost private companyvaluations, itisdifficultto geta
subset of comparable private businesses where there have
beenrecenttransactions.Analystsoftenhavetouseasubset
of publicly traded firms as comparable firms, derive a
multipleofrevenuesorearningsfromthesefirms,andthen
modifythismultipletovaluetheirprivatebusiness.Thekey
questioncenters onhowto adjusta multiple derivedfrom
publiclytradedfirmsforusewithaprivatecompany.There
are two alternatives:

1. Use an illiquidity discount, estimated using the same
   approaches described in the prior section, to adjust the
   multiple:Forinstance,ananalystwhobelievesthatafixed
   illiquiditydiscountof 25 percentisappropriateforallprivate
   businesses would then reduce the public multiple by 25
   percent for private company valuations. An analyst who
   believesthatmultiplesshouldbedifferentfordifferentfirms
   would adjust the discount to reflect the firm’s size and
   financial health and apply this discount to public multiples.


2. Instead of estimating mean or median multiples for
   publiclytradedfirms,relatethemultiplesofthesefirmstothe