The following statement is true, but I don’t see the full picture. Could someone break it down? Thanks in advance!
If an unadjusted price multiple is used to determine terminal value under the income approach to private company valuation, the value estimate will tend to be inflated.
I understand that terminal value represents value from the normal growth phase, however,
how does using a market-based multiple to compute terminal value would result in rapid growth being accounted for twice and thereby inflating the value estimate?
hmm i’m not sure about the rapid growth being accounted for twice. In the income approach, the idea to measure how much residual income is left over with the anticipation this may be paid to shareholders
For private companies you have he following to consider:
Lack of Control - No ability to influence the distribution of the earnings
Lack of marketabiity - Can’t use public markets to build leverage
If the price multiple is based on public company comps, it doesn’t reflect the liquidity discount applicable to private companies. So, the terminal value estimate is biased high, and so is its present value.