When valuing a subject company for sale, acquisition, or estate planning, the market-based valuation approach frequently utilizes pricing multiples from guideline public companies. This approach is simpler to apply when the subject company is public, as the risk characteristics between guideline public companies and another public company are generally more comparable. However, this approach may not be as easily applied to subject companies that are private, as the market participants may be undiversified investors subject to additional risks. This presentation addresses how guideline public companies' multiples can be adjusted for the valuation of private companies where firm specific risk is an important issue. The Authors discuss a practical method for determining a discount for company-specific risk consistent with cost of capital considerations associated with private companies.

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