AbstractsEconomics

A private company lacks a direct observable market value and several situations may require a practitioner to compute the value of a private company. Since most of the valuation methods in use are based on data derived from the public stock markets certain adjustments may be appropriate when valuing a private company. Marketability and liquidity is said to be one of the more observable differences between a public and a private company. This implies that the shares in a private company have a lack of marketability and liquidity in comparison to the shares in a public company, which practitioners may have to adjust for. Several quantitative studies are conducted on the subject in order reassure price differences between public and private companies, namely a private company discount (PCD). Furthermore, several quantitative studies strive to establish a general and standardized cost for lack of marketability (liquidity) expressed as the illiquidity discount or the discount for lack of marketability (DLOM). These studies have different perceptions and use different hypothesis to identify illiquidity, which in turn will lead to a large span of different discounts. Essentially, earlier research examines assets marketability and liquidity with the assumption of them being equal in all other aspects. Professional practitioners constantly seek guidance in these studies to justify their estimated and applied illiquidity discount/DLOM when performing a valuation on a privately held company. Furthermore, we have also observed survey-studies adopting a more qualitative method in order to appreciate the level of discounts applied in a valuation by professional practitioners. Consequently, this sea of studies provides the practitioner with a discount that ranges from 5% to 60% to take a stand on. The impossibility to determine the most adequate theory contributes to the inconsistency of how this issue is handled in reality by market participants and courts. In our study we first provide the reader with a rigorous literature study, which describes earlier research on the subject of illiquidity discount/DLOM. We conclude that research has gone one step too far when conducting all of these quantitative studies. This is why we conduct our own empirical data through semi-structured in-depth interviews with professional valuation experts on the Swedish market. This makes our approach a retake on the issue in order to generate suggestions to further studies. What we find is that all of the independent consultants, primarily, does not apply a discount when valuing a majority interest due to the paradigm on the Swedish market. In contrast, the private equity fund manager, which only acquires majority interest, can use this type of discounts in their dependent valuation of majority interests. However, when valuing a minority interest the independent valuation consultants use quantitative empirical studies to derive a starting point of the discount. The level of the discount is then estimated upon the purpose of the…