^*Patrick Anderson founded Anderson Economic Group in 1996, and serves as a Principal and Chief Executive Officer of the economic consulting firm. In this role he has successfully directed projects for state governments, cities, counties, nonprofit organizations, and corporations throughout the United States. Anderson is a recognized authority on business valuation and commercial damages and has provided expert testimony and consulting advice to major private and public sector organizations. Before founding Anderson Economic Group, he served as the Chief of Staff of the Michigan Department of State and as Deputy Budget Director for the State of Michigan under Governor John Engler. He was awarded NABE's Edmund Mennis Award for the best contributed paper in 2004. Anderson holds a Master's degree in Public Policy and a Bachelor's degree in Political Science from the University of Michigan. He is a member of NABE and the National Association of Forensic Economists.

Abstract

The vast majority of businesses in the United States are privately held, and approximately 99 percent meet a common government definition of "small." However, we know surprisingly little about the market values of these organizations. In this paper, we estimate the market value of privately held firms in the United States from sources on earnings, assets, and reported market value of multiple forms of business entities, including corporations, partnerships, LLCs, and sole proprietorships. We discuss various theoretical and practical methods of valuing assets, including those arising from economics, neoclassical finance, portfolio theory, and tradition. Concluding that most of them are not appropriate for valuing private firms, we use insights from dynamic programming and ratio analyses from traditional technique to produce a new estimate based on reported taxable earnings, net worth, and tax filing status. Using this approach, we estimate that privately held U.S. firms had earnings that exceeded those of publicly held firms in two recent years by a significant margin. Moreover, the market value of these firms exceeded that of publicly traded firms. We also conclude that policymakers, perhaps grossly, underestimate the true scale of "small" and privately held firms in the economy.