The title of a new article in Forbes declares “Valuing Private Companies Is an Art, Not a Science.” That’s hardly news to experienced business appraisers and valuation analysts—but just when the article gets interesting, depicting a private holding company that earns over $70 million in dividends per year from a 15% stake in a family-owned conglomerate run by a pair of maverick if not miserly brothers, it falls back on a “reasonable formula” for valuation that “seems to pass muster in tax court,” based on three variables:
- A discount for lack of control, which the article says “can be interpolated from the premium bidders pay to take over public companies” and ranges from 20% to 25%, “meaning stock that doesn’t have control trades at an equivalent discount.” (Really—it’s that simple, and defensible?)
- A discount for lack of marketability, which, based on studies of pre-IPO shares in private equity funds, “runs as large as 40%.” (Just like that, without any mention of restricted stock or other quantitative sources for DLOM.)
- Discounts for holding companies, based on long-term studies of real estate limited partnerships, still come in “as large as 39% of NAV,” the article says.
Shouldn’t the sophisticated business reader be on top of valuation? In the past few weeks, we’ve reported articles in the New York Times and now Forbes, not with a mind to discrediting the sources or their authors, but only to point out their omission of business appraisers as credible sources with current, cutting-edge insights into complex valuation topics. Publication is still the best publicity for any professional, and in Forbes, any comments the editors decide to “call out” online will be highlighted across the publication’s financial and business network. Already there is a “called out” question on how to value voting rights, answered by the author (and citing Damodaran). Letter to the editor or author, anyone?