The Discount Rate in Valuing Privately Held Companies

BVResearch Pro
American Society of Appraisers Business Valuation Review™
Summer 2011 Volume 30, Issue 2 pp. 70-81
Juana Alonso Cañadas, PhD
Alfonso A. Rojo Ramirez, PhD


To value privately held companies, considered as nonquoted companies and thus with low marketability, two methods can be applied to adjust the business value for extra risk: (1) reducing the calculated value by the transaction costs or (2) raising the minimum expected rate of return by investor. The Spanish Accounting and Business Administration Association suggests use of the second method. This article examines its proposal in an empirical way, concluding that the discount rate estimated is 2.45% higher than that calculated by the traditional CAPM model, which implies a drop in company value of nearly 20%. In other words, the AECA's proposal can be considered a valid method for appraisers to calculate the discount rate in the context of valuing privately held companies.
The Discount Rate in Valuing Privately Held Companies
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