HMRC changes have increased the difficulty of providing support for rates of return for illiquid and difficult-to-market minority shares. However, business valuers are still completing valuations on behalf of minority owners for fiscal, buy-sell, and contentious purposes. The 2020 Discount for Lack of Marketability Study released late last month by Partnership Profiles offers objective rate of return measures to implement the empirical method developed by Bruce Johnson and James Park. This report provides current DLOM rates of return and includes a thorough explanation (and example) on how to apply them.
The Johnson/Park empirical method uses three approaches to measure the increase in return required to compensate investors for the lack of marketability of a subject interest. As the authors explain:
When determining the appropriate amount by which the interest should be discounted for lack of marketability, the effective increase in return should be sufficient to compensate an investor for illiquidity and the additional risks associated with ownership of a privately held interest.
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