Why are private companies typically valued less than public companies?

       There are numerous factors which underlie the so-called "private company discount" (PCD) and help to explain why most private firm companies are valued at lower multiples than publicly-traded firms.  Although factors such as company size and management depth play a major role, many experts agree that the greatest reason for differences in multiples paid for private firms versus public firms is the relative degree of exposure to the market, i.e. marketability and liquidity differentials.  All public companies have substantial  exposure to the market through quotation systems, regulatory filings, and various reporting requirements.  Another possible explanation involves the ability of the private firm seller to structure a sale which reduces the tax burden to a degree which allows him/her to accept a lower sales price.

       The owner of a private firm  cannot simply contact his or her stockbroker and execute a transaction in seconds, and have cash in hand within three business days. It may take months to prepare a controlling interest for sale, with significant legal, accounting, and management time costs incurred in The process.  A range of empirical studies have been undertaken to quantify the PCD with results spanning a spectrum of as low as 12% and as high as 70% with a midrange of close to 40%.