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Estimating the equity premium for non-listed firms using the acquisition multiple approach

Gerritsen, G.W. (2021) Estimating the equity premium for non-listed firms using the acquisition multiple approach.

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Abstract:Corporate finance boutiques, transaction services and valuators often struggle with the valuation of non-listed firms. Almost 99% of the companies is not listed and the well-known valuation method (DCF) is based on principles which are only available for listed firms. Namely, the determination of the cost of equity and with this also the discount rate for non-listed companies, because there is no stock price information available for non-listed firms. Due to the fact that there are additional risks for investments in non-listed firms, practitioners often use the small firm premium (SFP) to overcome this issue. However, the SFP is only based on the size of the company and its existence is heavily debated in literature. This research discusses four different methods to analyse the premium for non-listed firms and uses the acquisition multiple approach to estimate it (also mentioned in literature as the private company discount). Evidence provided in this study shows the existence of the non-listed firm premium based on three different acquisition multiples (5.33% EBITDA-multiple, 19.32% EBIT-multiple and 13.71% Sales-multiple). In order to compare non-listed and listed firms, this study matches listed firms based on size, industry and timeframe. The study also explores the effect of different firm characteristics e.g. size, leverage, growth rate.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
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