Size premium in small business valuation: Analysis of closely-held firms

One of the most misunderstood components of valuing a small closely-held business is how to address the impact of small size. Most closely-held enterprises are relatively small in size, with market values less than $1million. Many small mom and pop operations, or single owner-operator family businesses, often have market values even smaller. The most common method to account for size is to use the size premium reports from Kroll or another financial data service provider. However, these small firm premiums are determined exclusively from publicly-traded firms, where even the category of the smallest publicly-traded firms are still magnitudes larger than the typical small closely-held firm. This study examines the Kroll size premium data on publicly-traded firms and compares it with an analysis of size data from a proprietary database of closely-held firm transactions. We develop various models that better assess the impact of size on the cost of equity calculations for small, closely-held firms.