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IBBC CAPITAL ACADEMY / 2027

Value the private business before ownership adjustments

Independent IBBC Capital draft content for self-study. Not affiliated with or endorsed by CFA Institute. New lessons await subject-matter review. No CFA designation or official PSM credit is awarded.

Learning goals

  • Calculate equity value before ownership adjustments.
  • Explain why 21 applies to this case.
  • Identify the case-specific assumption or failure mode before taking action.

Draft · approximately 30 minutes, excluding further revision.

Shared case and decision context

A private firm reports EBITDA 18 including excess owner compensation 3 above a market replacement salary. Sustainable EBITDA is therefore higher. A comparable operating EV/EBITDA multiple is 6; net debt is 20. No control premium or marketability discount has yet been justified.

Economic or professional mechanism

Private-company analysis normalizes owner transactions, nonbusiness assets and nonrecurring items before applying an income or market approach. The value basis—controlling or minority, marketable or illiquid—must match the evidence. Private firms may lack reliable audited data and diversified key-person resources; these risks require analysis rather than a universal percentage haircut.

Apply, challenge and communicate

Normalized EBITDA is 21; operating EV is 126 and equity value before ownership adjustments 106. Removing all owner compensation would be wrong because a replacement manager still costs money. Do not stack a control premium and illiquidity discount without reconciling the claim and possible overlap.

Purpose, discount rates and consistent ownership adjustments

A private-business valuation may support a transaction, shareholder dispute, succession or financial reporting; the required basis of value and control rights can differ. Separate enterprise economics from a particular ownership interest. Normalize owner compensation and related-party transactions while retaining recurring costs a buyer must bear.

An expanded CAPM adds a justified size or other premium to risk-free plusbeta×equity premium; a build-up approach combines explicitly selected premia without a tradedbeta. Avoid charging the same concentration or illiquidity risk in the cash forecast, rate and ownership discount three times. For assumed Rf 3%, beta 1.1, equity premium 5%, size 2%, required equity return=10.5%, before any separately justified component. Inputs are illustrative, not a universal private-company rate.

Suppose a supported control basis is 100 and a 20% marketability discount is applicable to the specific interest; value 80 follows. A control premium 25% and lack-of-control discount 20% are reciprocal on their respective bases, not equal percentages:1/1.25=.8. Never add/subtract such percentages without matching bases and documenting empirical/legal support. An illiquid share is not automatically worth a standard fixed discount.

Formula and assumptions

Equity value=normalized EBITDA*EV multiple−net debt

Case analysis with explicit assumptions

  1. A private firm reports EBITDA 18 including excess owner compensation 3 above a market replacement salary. Sustainable EBITDA is therefore higher. A comparable operating EV/EBITDA multiple is 6; net debt is 20. No control premium or marketability discount has yet been justified.
  2. Method: Equity value=normalized EBITDA*EV multiple−net debt
  3. Case result: 106. Normalized EBITDA is 21; operating EV is 126 and equity value before ownership adjustments 106. Removing all owner compensation would be wrong because a replacement manager still costs money. Do not stack a control premium and illiquidity discount without reconciling the claim and possible overlap.

Errors to catch

  • Do not replace the stated assumptions with an unstated shortcut. Reconcile units, timing and the claim being valued or duty being assessed.
  • One fixed percentage for every firm is not a defensible conclusion for these case facts.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.