Alternative investment products are generally run by firms whose ownership is controlled by only a handful of owners. However, while most closely-held companies are small, non-public firms, some large publicly-traded companies fall into this category if their stock is held by only a few institutional owners. Closely-held companies can be organized in various forms such as general or limited partnership, sole proprietorship, regular corporation etc. The legal environment in which a closely-held company operates impacts the valuation of that company. Prevailing state laws, for example, define company ownership, voting power and other issues of control. Furthermore, asset valuation may depend on interpretations specific to the company's legal jurisdiction.

Alternative Valuation Methods for Closely Held Companies

  • Cost Approach - The cost approach determines what it would cost to replace all the company's assets in their present form and condition.
  • Comparables Approach - Market values are estimated via some benchmark. The benchmark may be a similar corporation that is publicly-traded or has recently sold. The benchmark needs to be constantly updated to reflect market changes.
  • Income Approach - Uses a discounted income or cash flow model. Any anticipated future economic income flows are discounted at an appropriate rate.
    • After valuing the firm, a number of discounts or premiums are applied to the preliminary value.
    • Discounts usually are taken for the illiquidity. Since the stock of closely-held or private corporations does not trade on public markets and may be difficult to sell, a significant discount is applied.
    • A discount may also apply if one is only acquiring a minority interest and will have little influence in how the business is run.
    • Alternatively, a premium may be paid for acquiring controlling interest.


Commodities as Alternative Investments

Related Articles
  1. Managing Wealth

    Valuing Private Companies

    You may be familiar with publicly-traded companies, but how much do you know about privately-held firms?
  2. Investing

    Fundamental Analysis: A Brief Introduction To Valuation

    By Ben McClureWhile the concept behind discounted cash flow analysis is simple, its practical application can be a different matter. The premise of the discounted cash flow method is that the ...
  3. Personal Finance

    How To Value A Real Estate Investment Property

    Make sure you know what your real estate investment is worth before you sign the ownership papers.
  4. Investing

    Top Reasons IPO Valuations Miss The Mark (MS, ZNGA)

    The costly services of investment banks don’t necessarily guarantee accuracy in IPO pricing.
  5. Managing Wealth

    Valuing Startup Ventures

    Valuing a company is a difficult task, regardless of the size of the business - but these methods can help.
  6. Markets

    How Do I Value Shares I Own In A Private Company?

    The most common method, and easiest to use, is to compare valuation ratios for a private company against those for a comparable public company.
  7. Investing

    How To Value An Internet Stock

    An academic study, published several years after the peak of the dot-com bubble in March 2000, accurately described just how whacky internet valuations grew until the bubble burst. The study's ...
  8. Financial Advisor

    When Do Alternatives Add Value to a Portfolio?

    Alternative investments continue to grow in popularity. But when do they really add value to a client's portfolio?
  9. Investing

    Equity Valuation: The Comparables Approach

    The main purpose of equity valuation is to estimate a value for a firm or security. There are three primary equity valuation models: the discounted cash flow (DCF), cost and comparable approaches. ...
  10. Financial Advisor

    Are Alternatives Right for Your Portfolio?

    Alternative investments are increasingly making their way into retail investors' portfolios. Are they a good fit?
Trading Center