How do we value private companies? Case example: Sørlandschips AS

Abstract

This thesis has tried to discuss and analyze how an investor should try to value a private company. In addition to special characteristics like the value of control, illiquidity discount and lack of diversification, normal valuation issues and techniques have been discussed as well. The thesis is divided in three parts. The first is a theoretical part in which one considers different valuation models, how to implement these, and the inputs required. The second is a part specifically towards the special characteristics of private company valuation, and the third is the application part of the thesis, which tries to incorporate the two first parts of the thesis. Sørlandschips AS was chosen for application part, but no contact was made with the company, so all information presented is public knowledge. The main reason for not engaging any contact with the company was to illustrate some of the difficulties that occur with private company valuation. In the application part the company the residual earnings model and the method of comparables were both used. Bold assumptions were made regarding the inputs for valuation, due to the lack of information. The values for the equity ranged from 28,59 million to 43,530 million NOK, depending on which model was used, on assumptions concerning the cost of equity. The elements of illiquidity discount, value of control and lack of diversification were investigated, and found very difficult to apply to the valuation. However, some efforts were made, and the most important lesson learned from this is that private company valuation is far more difficult than standard public stocks. The mindset that valuation indeed is just as much an art as a science will be reflected on this thesis. In addition, I would like to say that what one should do in theory, is not always the best solution in practice, as this thesis has taught me.