Adjusting the Comparable-Company Method for Tax Differences When Valuing Privately Held "S" Corporations and Llcs

Journal of Applied Finance, Vol. 12, No. 2, Fall/Winter 2002

Posted: 10 Jul 2003

See all articles by John D. Finnerty

John D. Finnerty

Finnerty Economic Consulting LLC; Fordham University - Finance Area

Abstract

Participants in the private equity market often use the share prices of publicly traded regular (or C) corporations as bench marks for valuing pass-through entities, such as S corporations and limited liability companies (LLCs). This paper analyzes the tax-related valuation adjustments that are required to account for the different tax status of C corporations and pass-throughs, which are not subject to corporate income taxation. I show that a pass-through entity has the same value in a tax-free corporate acquisition as an otherwise identical C corporation, but that the pass-through entity is more valuable in a taxable acquisition because of the available step-up tax elections. I also show that tax factors cause a minority interest in a pass-through entity to generally be more valuable than the same minority interest in a C corporation. I quantify the pass-through's tax-related valuation premium and show how this premium is related to the tax regime and to the firm's dividend policy.

JEL Classification: G12

Suggested Citation

Finnerty, John D., Adjusting the Comparable-Company Method for Tax Differences When Valuing Privately Held "S" Corporations and Llcs. Journal of Applied Finance, Vol. 12, No. 2, Fall/Winter 2002. Available at SSRN: https://ssrn.com/abstract=360361

John D. Finnerty (Contact Author)

Finnerty Economic Consulting LLC ( email )

60 East 42nd Street
Suite 2910
New York, NY 10165
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

Fordham University - Finance Area ( email )

113 West 60th Street
New York, NY 10023
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

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