KristinKandyhasapretaxoperatingmarginof25%,azero
turnoverratio(toreflectitsstatusasaprivatecompany),and
a beta(total) of2.94.This generatesan expectedEV/sales
ratio of 0.835.
MultiplyingthisbyKristinKandy’srevenuesof$3millionin
themostrecentfinancialyeargeneratesanestimatedvaluefor
thefirmof$2.51million.Thisvalueisalreadyadjustedfor
illiquidity, and it is higher than the estimates of value
obtained from the discounted cash flow approaches in
Illustrations 14.1 and 14.2.
CONSEQUENCES OF ILLIQUIDITY
Illiquidity has consequences for almost every aspect of
finance.Thequestionofwhetheracompanyshouldgopublic
may ultimately represent a trade-off between the control
(associatedwithbeingtheownerofaprivatebusiness)and
theliquidityofbecomingapubliclytradedfirm.Investors,be
theyportfoliomanagers,privateequityinvestors,orventure
capitalists,willhavetomodifyhowtheyinvestandwhatthey
investin,basedonliquidity,andperformanceevaluationand
riskmanagementtoolshavetograpplewithilliquidity.Basic
corporatefinancemeasures(suchasthecostofcapital)may
have to be adjusted to reflect illiquidity, and investment,
financing, and dividend decisions will undoubtedly be
affectedbyafirm’sperceptionofitsownliquidity(orlack
thereof).
Going Public (or Private)