You have been asked to value Office Help, a private firm providing Office support services in the New York area.
The firm reported pretax operating income of $10 million in its most recent financial year on revenues of $100 million. In the most recent financial year, you note that the owners of the business did not pay themselves a salary. You believe that a fair salary for their services would be $1.5 million a year.
The cost of capital for comparable firms that are publicly traded is 9%. (You can assume that this firm will have similar leverage and cost of capital.)
The firm is in stable growth and expects to grow 5% a year in perpetuity. The tax rate is 40%.
The average illiquidity discount applied to private firms is 30%, but you have run a regression and arrived at the following estimate for the discount:
Illiquidity discount = 0.30 − 0.04 (ln [Revenues in millions])
Estimate the value of Office Help for sale in a private transaction (to an individual).