In valuing a private company, why are public company comparables typically discounted while precedent transaction multiples are not?

In valuing a private company, why are public company comparables typically discounted while precedent transaction multiples are not?

• A. Because with precedent transactions you acquire the whole company, so the shares become illiquid; public shares remain liquid, so you discount public comps.
• B. Because public company multiples already reflect liquidity, while precedent transactions ignore liquidity.
• C. Because private companies have different accounting standards.
• D. Because liquidity differences are irrelevant to valuation.

Answer: (A)

The main idea is that liquidity and control are treated differently when you value a private company using comps. Public company multiples come from liquid, freely tradeable shares. To apply those multiples to a private target, you have to adjust for the private company’s lack of liquidity and marketability, so you apply a liquidity discount to the public comparables. Precedent transactions, on the other hand, involve buying the entire company. The price paid in those deals already reflects both the control premium and the illiquidity baked into a private acquisition. Since you’re valuing the whole business, there isn’t an additional liquidity discount to apply—the deal price has already priced in the liquidity risk of owning a private company. So, public comps require a liquidity adjustment to translate to private-company value, while precedent transactions do not because their prices inherently incorporate that liquidity and control risk. The other options misstate how liquidity is embedded in deal prices or deny its relevance.

The main idea is that liquidity and control are treated differently when you value a private company using comps. Public company multiples come from liquid, freely tradeable shares. To apply those multiples to a private target, you have to adjust for the private company’s lack of liquidity and marketability, so you apply a liquidity discount to the public comparables.

Precedent transactions, on the other hand, involve buying the entire company. The price paid in those deals already reflects both the control premium and the illiquidity baked into a private acquisition. Since you’re valuing the whole business, there isn’t an additional liquidity discount to apply—the deal price has already priced in the liquidity risk of owning a private company.

So, public comps require a liquidity adjustment to translate to private-company value, while precedent transactions do not because their prices inherently incorporate that liquidity and control risk. The other options misstate how liquidity is embedded in deal prices or deny its relevance.