Posted by Bob on August 20, 19100 at 05:48:15:
A private or closely held company and a company with publicly traded stock are evaluated in the same way, but with a relatively small private company there is much more emphasis on net tangible assets (net worth or book value) than on future prospects. A common mistake is to add the estimated value based on the assets and based on the earnings -- this is double counting.
The most important question in small business appraisal is the purpose of the valuation. Why do you need to know the value of a private company or of a number of its shares? The value may vary for purchase and sale, income tax, estate tax, collateral, divorce and other litigation or arbitration.
The first step is to estimate the value of the company as a whole. The second step is to determine the value of one share of voting common stock equity. The third step is to calculate the value of the total number of shares owned.
If the shares are restricted (e.g., letter stock) or are otherwise limited in marketability, then their valuation may be subject to somewhat arbitrary declarations of "fair value" by the controlling owners who can hire an "independent" business appraiser. Minority-interest stockholders in such situations do not always know their rights or have practical remedies to protect them.
See Graham and Dodd's book entitled Security Analysis (any edition) for more information about business appraisal and common stock valuation.
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