Public versus Private: New Insights into the Private Company Discount

Sabrina Goetz

doi:10.1515/jbvela-2020-0027

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Public versus Private: New Insights into the Private Company Discount

Sabrina Goetz

Veröffentlicht/Copyright: 20. Juli 2021

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Aus der Zeitschrift Journal of Business Valuation and Economic Loss Analysis Band 16 Heft 1

Abstract

We examine whether private companies are valued with a discount compared to publicly traded companies. The analysis is based on a comparison of private company transactions with those of public companies. Whereas prior studies build pairs based on industry membership, we match private companies with public counterparts that are comparable in value relevant firm characteristics, i.e. profitability, risk, and growth, to calculate the percentage difference in valuation multiples. We find that private companies are valued on average with a discount on the EBITDA-multiple of 13% compared to their public counterparts. Private companies sell at lower discounts, if the acquirer firm is publicly listed. As size is associated with lower risk, we show that larger private companies sell at lower discounts.

Keywords: business valuation; private companies; private company discount

Corresponding author: Dr. Sabrina Goetz, University of Hohenheim, Stuttgart, Germany, E-mail: sabrina.goetz@uni-hohenheim.de

Acknowledgments

We thank Dirk Hachmeister, participants of the OUC Conference 2018, and students of the EAFIT University in Medellín, Colombia, for helpful comments. We gratefully acknowledge access to SDC Platinum by Thomson Reuters and Orbis BvD provided by DALAHO, University of Hohenheim.

Appendix: Variable Definition

Table 6:

Variable definition.

This table contains the definitions of all used variables, including the multiple calculation, the matching variables, the discount calculation and the regression variables.

Variable	Definition
EBITDA-multiple	e m i , t = e n t e r p r i s e v a l u e i , t E B I T D A i , t Enterprise value from SDC Platinum: “The enterprise value of a transaction is calculated by multiplying the number of actual target shares outstanding by the offering price and then adding the book value of short-term debt, straight debt, convertible debt, and preferred stock less marketable securities. The latter values are based on the most current financial information prior to the announcement of the transaction.”
Growth	g r o w t h i = g r o w t h r a t e for firm i over all firm years T (T=3)
ROE	R O E i , t = n e t i n c o m e i , t b o o k v a l u e o f c o m m o n e q u i t y i . t R O E of firm i in year t
Risk	r i s k i = σ o p e r a t i n g c a s h f l o w i , T Standard deviation of operating cash flow for firm i over all firm years T (T=3)
Private company discount	P C D = 1 − ( e m p r i v a t e e m l i s t e d )
Ind	ind is an indicator variable that takes a value of one if the target firm and the acquirer firm is in the same SIC Code and zero otherwise.
Listed	listed is an indicator variable that takes a value of one if the acquirer is publicly listed and zero otherwise.
Size	s i z e i , t = ln ( t o t a l a s s e t s i , t )
Negative income	negative income is an indicator variable that takes a value of one if the target’s net income one-year prior the acquisition is negative and zero otherwise.
Pair difference	pair difference controls for percentage difference in sales between the private firm and its public counterpart.
Year dummies	Year dummies are indicator variables that take a value of one if the acquisition has taken place in the respective year and zero otherwise.

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Received: 2020-11-14

Accepted: 2021-05-05

Published Online: 2021-07-20

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Artikel in diesem Heft

https://doi.org/10.1515/jbvela-2020-0027

Schlagwörter für diesen Artikel

business valuation; private companies; private company discount