Private firm valuation

AndrV

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Does the use of normalised earnings instead of reported earnings for private firm valuation assumes a controlling perspective?
Thx
 
I would assume so. In the case of the TT & Mock questions I have seen you are adjusting to normalize earnings by making decisions that include firing expensive family members of the current owners and such.
 
It really depends on the type of adjustment you’re making. Like Yayyywork noted, if you’re making adjustments to normalize officers’ compensation based on industry data, then you’re making a control-based adjustment. Thus, the cash flows are on a “controlling interest” basis and will require a discount for lack of control to arrive at the value of a single, nonvoting share or other noncontrolling interest.
However, if you’re only making adjustments to reverse the effects of extraordinary items (fire loss, material legal settlement, etc.), there is no discount for lack of control required as the cash flows are still from the perspective of the minority interest investor/owner.
 
Good point, I was basing my answer on most of the normalized earnings section in the private firm valuation reading in Equity but obviously you could normalize earnings for a company you wouldnt be taking a controlling position in as well.
 
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