Valuation of Unlisted Companies

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School of Business | Bachelor's thesis
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This thesis is done as a literature review on the valuation of unlisted companies and their discounts compared to listed companies. I will discuss why unlisted companies are important to us and why their valuation is important and to whom. I go through the most used valuation methods and what needs to be accounted for when using them to value unlisted companies. The topics are calculating unlisted company discounts, how they are calculated, and what are their shortcomings and advantages. After the literature review section, I will show tables of the publication trends about this subject and their main findings. For last, I will discuss conclusions and suggest what could be researched in the future and why. This topic suffers from a significantly smaller amount of research compared to the amount of research on listed companies. The number of people who are interested and can use the research results and information about unlisted companies overall to their gain is significantly smaller than with listed companies because listed companies can be traded publicly by anyone. My goal is with this thesis to bring the most relevant research about the subject to one paper and discuss it while reflecting on the valuation of unlisted companies with different valuation methods. Unlisted companies are of great importance to the economy, the fundamental backbone of growth. They employ a significant number of people and generate a big portion of the taxes. 99% of companies are unlisted companies and for example, in Finland, most of them are family owned. This nature is important to the economy as it brings economic well-being also to the smaller municipalities. The company structure in most countries is that the number of unlisted companies vastly outnumbers the number of listed companies. Unlisted companies create over fifty percent of the gross value of the whole private sector. The number of acquisitions involving unlisted companies vastly outnumbers the number of acquisitions with listed targets. (Capron & Shen, 2007). Unlisted companies do have discounts compared to listed companies which are mainly based on the lack of marketability. Investors require higher expected returns from an asset that can potentially cost them to miss opportunities because of a lack of liquidity. The discount amount varies depending on multiple factors such as size, profitability, and industry sector. The discounts can be observed by comparing liquid and non-liquid same company’s stock, comparing pre-IPO and post-IPO prices, comparing comparable listed and unlisted companies' M&A transactions, and analyzing unlisted company venture capital exit prices and valuations. This thesis shows how hard it is to determine a discount for an unlisted company and to value it fairly. The literature has not come to a consensus on the topic and the research results vary widely. Each discount valuation approach suffers from some fault which causes the results to be biased. And each of the three most used valuation method has its shortcomings in the valuation of unlisted companies. These biases and weaknesses combined with the issue that unlisted companies’ financial data can be of lower quality and/or manipulated compared to listed companies which go through tighter reporting and disclosure requirements make it hard to value them.
Thesis advisor
Nickpour, Ali
valuation, private, discount, unlisted
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