Abstract

The relative illiquidity of private firms is a fundamental characteristic differentiating them from publicly traded firms. This article fills a void in the business valuation literature by addressing the impact of a private business's location upon its liquidity. Using Pratt's Stats, we construct and examine a measure we call Days-on-Market (DOM), the number of days it takes for a private business to sell. We find that businesses located in states with a higher level of entrepreneurial activity (i.e., more businesses and business formations) sell approximately 15% faster, other things constant, than businesses located in states with less entrepreneurial activity. At the city level, we show that businesses located in large urban areas and in state capitals sell 20% faster than businesses not so situated. We attribute these observations to stronger entrepreneurial activities, which enhance liquidity in urban and state capital areas. Our findings suggest that appraisers should consider higher illiquidity discounts for businesses located in rural areas in states with low levels of entrepreneurial activity. More research is necessary to explore the relationship between a business's location, its relative valuation, and its liquidity.