Quantifying the Private Company Discount: Evidence from the U.S

Abstract

A common pitfall in valuing privately held companies is the appropriate estimation of risk parameters. Discount rates that are estimated using standard techniques, such as CAPM, must be adjusted to reflect, for instance, the illiquidity associated with owning a private firm. This task of assigning an accurate discount for private firms is a difficult matter, with subjective rules of thumb being a common solution.

This study attempts to shed light on the thorny question: How much discount should be used to capture the risks associated with a firm being private instead of public? To estimate this discount, I examine differences in acquisition prices between private firms and their publicly traded peers in the U.S. during 2002 - 2022. I find discounts in private firm acquisition prices, that vary from 19.81% to 28.25% depending on which valuation multiple is used as a measure. The highest discount (32.2% and 31.1%) is found in the chemicals and manufacturing industries, and the lowest discount (14.8%) in the consumer nondurables industry. In addition, I find some indication that private firms with higher profitability have lower discounts and that a public acquiror entails lower discounts. Moreover, the results suggest that the amount of discount present in private firm acquisitions varies across time and is correlated with stock market returns.