Page 54 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 33.i: Calculate the value of a private company
based on market approach methods and describe READING 33: PRIVATE COMPANYVALUATION
advantages and disadvantages of each method – 3
types! MODULE 33.3: MARKET-BASED VALUATION

Prior Transaction Method
Uses transactions data from the stock of the actual subject company and is most appropriate when valuing minority (noncontrolling)
interests. Can be based on the actual transaction price or multiples derived from such transactions. Ideally, the previous
transactions would be arm’s-length, of the same motivation (strategic or financial) as the subject transaction, and fairly recent.

LOS 33.j: Describe the asset-based approach to private company valuation.

Estimates the value of firm equity as the fair value of its assets minus the fair value of its liabilities.

• It is generally not used for going concerns.
• Because it is easier to find comparable data at the firm level compared to the asset level, the income and market approaches
would be preferred when valuing going concerns.
• It is difficult to find data for individual intangible assets and specialized assets.
• Of the three approaches, the asset-based approach generally results in the lowest valuation because the use of a firm’s
assets in combination usually results in greater value creation than each of its parts individually.

The asset-based approach might be appropriate in the following circumstances:
• Firms with minimal profits and little hope for better prospects (could be valued more highly for its liquidation value rather than as
a going concern by a firm that can put the assets to better use).
• Finance firms such as banks, where their A and L values (loan and security values) can be based on market prices and factors.
• Investment companies such as real estate investment trusts (REITs) and closed-end investment companies (CEICs) where the
underlying assets values are determined using the market or income approaches. Management fees and the value of
management expertise may result in values different from net asset value.
• Small companies or early stage companies with few intangible assets.
• Natural resource firms where assets can be valued using comparables sales.