Factors affecting the selling prices of small firms

Abstract

58 percent of the jobs in the United Stated are created by firms with fewer than 500 employees (Davis, et al. [1998]). Yet, there is only limited research done on the industry trends and conditions affecting small company sale transactions. The small business industry has very different dynamics compared to the large public companies. Based on my findings, small businesses have significantly lower price-to-earning ratios compared to large companies. In this paper, I study the economic conditions affecting small firms and variables that affect the selling prices of these companies. I show that there exists a strong informational asymmetry between the buyers and sellers of small companies that lower the transaction prices. I also show that market illiquidity and contingent contracts can impact the selling prices of small companies.