Publicly Traded Companies and Privately Held Companies are Valued Differently

In Lotz, at the divorce trial, wife’s expert valued the marital business by relying on a comparison between the business and the price-earnings ratio from publicly traded corporations. Wife’s expert did not utilize price-earnings ratios from other private businesses because the information was not readily available. Husband was awarded the business and his divorce lawyer appealed the value.

The Court of Appeal agreed with husband’s divorce lawyer and held that wife’s expert’s valuation method was based on invalid assumptions and comparisons. The Court of Appeal found it improper to compare a private corporation to publicly traded corporations since there were “enormous differences between the two types of corporations, including “sales volumes, liquidity of stock, risk, and cost of ‘going public.’”

In re Marriage of Lotz (1981) 120 Cal. App. 3d 379