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KEY PERSON DISCOUNT IN SMALL FIRMS: Evidence from the 1990s’
BY:
JAMES A. LARSON, PH.D., ASA, CFA AND JEFFREY P. WRIGHT, ASA, CFA
ABSTRACT
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Published Articles |
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This study was conducted largely to update our earlier efforts into the research field of “key-person” discount. Upon completion of this current research, we have learned that our original hypotheses are still valid. The three major results of this study can be summarized briefly as follows: |
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Business appraisers should not use the key-person specific risk factor as a quick and easy justification for building up a higher equity discount rate that in turn leads to a lower equity value.
The preponderance of evidence in this and earlier studies indicates that a “key-person” discount was present in less than one-half of all identified cases.
When the discount is deemed appropriate, the order of magnitude is generally a decrement of 4 - 6% in equity value. |
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These results are interesting to the business appraiser because they contradict the use of across-the-board key-person discounts in business valuation assignments. Our results are based on the assumption that changes in equity values due to the loss of key executives in smaller publicly traded businesses can be extrapolated into the universe of privately held firms.
A copy of the complete article in PDF format can be downloaded here. Copies of earlier articles can be emailed to you if requested. Requests should be sent to Jim by clicking on the link below. |
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Larson Appraisal Services |
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Business Valuation Specialists |
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Larson Appraisal Services |
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