You may have a valuable treasure hiding in your investment portfolio or even in the bottom of your desk drawer. If you own stock in a privately owned business-that is, stock that is not publicly traded - you may be in possession of a valuable commodity.
There are many ways in which you may already own stock in privately owned businesses. You may be the owner or an employee of the business who received or bought stock in the company. You may have inherited the stock or received it as a gift. Given that you cannot find this stock on the exchanges or look it up in the newspaper, how can you determine its value? You may have to do some research.
First, contact the company and inquire about any transactions in the stock. Recent transactions between informed, sophisticated parties are a very good indicator of value. Second, request several years of financial statements and analyze them just as you would those of a publicly traded stock. Review the company's returns on equity as an indication of whether or not the stock should be worth more than book value. Also, look at the earnings growth trend as the basis for estimating a price-to-earnings multiple.
On the other hand, the stock's value may be based more on its assets than on its earnings. For example, a company comprised of undeveloped land, which is on the books at an original low cost, may be losing money due to current high property taxes. In that case, the valuation of the stock should be based on a current appraisal of the land.
A final step in the valuation process is to apply a discount to reflect the stock's lack of marketability. This practice is accepted by the IRS, and it is desirable from the standpoint of reducing estate tax. Studies and court cases support marketability discounts in the range of 10 to 40 percent. The lower end of the range would be appropriate for a company making large distributions, stock buybacks, or planning to liquidate. The high end of the range would apply to totally illiquid situations. Generally, marketability discounts will not be used where the shareholder has a controlling interest, since he/she could force liquidation. Unless you're in that position, there's usually not much you can do with a closely held stock other than hold onto it and hope you will eventually be rewarded by liquidity events such as dividends or the stock going public.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.