- Avoidable mistakes: Total Beta — the right risk measure
- Key-Person Discount — explained practically for your portfolio
- Illiquidity discount — concrete recommendations
Listed companies have a market price. Private ones do not. This changes the valuation logic: no Market Beta, no liquidity premium, and the key-person risk can reduce value by 15-25%. Professor Damodaran (NYU Stern) developed the standard methodology.
Total Beta: The Right Risk Measure
Standard Beta only measures systematic risk. For non-diversified owners, you need Total Beta: Total Beta = Market Beta / Correlation with Market. Example: Beta 1.18 / Correlation 0.5 = Total Beta 2.36. Cost of Equity rises from ~10% to ~14.5%.
Key-Person Discount
In many SMEs, 50-80% of revenue depends on the founder. Key-Person Discount: typically 15-25%. Factors to consider: revenue concentration, customer relationships (personal vs. institutional), process documentation.
When you apply this knowledge, you gain a concrete advantage over competitors who enter investor conversations without this foundation. Use the insights from this article as the basis for your next step.
Illiquidity Discount
15-35% depending on the study. Damodaran recommends: apply the discount EITHER to the discount rate OR to enterprise value — never both. The discount varies by buyer type: Private-to-Private (highest), Private-to-Public (moderate), IPO (lowest).
Our Capital Intelligence considers all characteristics of private companies.
Further reading: 3 Valuation Methods · DCF Valuation · EBITDA Multiple
