Question: You have been asked to value Office Help Inc., a private firm providing office support services in the New York area.
• The firm reported pre-tax 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%. While the average illiquidity discount applied to private firms is 30%, 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).