Valuing private company: Keshav Sinha is interested in investing in a private company. Based on earnings multiples of similar publicly traded firms, he estimates the value of the private company's stock to be $21.27 per share. He plans to acquire a majority of the shares in the company. The expected control premium is 10 percent. Keshav estimates the marketability discount for such a firm to be 12 percent. The discount for the key person, one of the founders who may leave the firm upon Keshav's control of the firm, is 20 percent. What price should he be willing to pay for these shares?

Question

Quizplus · Accepted Answer

To calculate the price Keshav should be willing to pay, adjust the estimated value per share for the control premium and then apply the marketability and key person discounts. Start with $21.27, add a 10% control premium ($21.27 * 1.10 = $23.40), then apply a 12% marketability discount ($23.40 * 0.88 = $20.59), and finally apply a 20% key person discount ($20.59 * 0.80 = $16.47).

Valuing Private Company: Keshav Sinha Is Interested in Investing in a Private