Emotional Returns and Emotional Costs in Privately Held Family Businesses: Advancing Traditional Business Valuation

Abstract

This article introduces a formula to assess the total value of privately held family businesses from the owner's perspective. It is argued that the total value of a business is not only composed of its financial worth and private benefits, as is usually assumed by traditional financial theory, but that emotional components also have an impact on valuation. In particular, it is assumed that emotional returns (ER) positively affect total value, whereas emotional costs (EC) negatively affect total value. Even though every stakeholder faces emotional costs and returns, it is solely the family business owner who ultimately decides on the worth of a business and consequently factors ER-EC into his or her valuation. The presented formula provides a better understanding of investment decisions in family businesses and a more accurate valuation of these businesses.