Last Monday Valuation Advisors released a major additional dataset for transactions where the pre-IPO timeframe is two years or longer. “The idea behind capturing discounts beyond two years was to give analysts another source to use in determining a lack of marketability discount based on their professional judgment of the likely timetable to liquidity,” says Brian K. Pearson(Valuation Advisors, LLC).“If you believe a likely timetable for liquidity is very long or possible never, discounts beyond two years will be relevant to your work.”
When are discounts beyond two years more likely? “Clearly, anything that makes a company, either a 100% interest or less, less attractive, increases the likely timeframe to liquidity,” Pearson says. The following are just a few issues that may make the timetable to marketability longer:
- lack of profitability
- low margins
- significant competition
- low barriers to entry
- little capital requirements
- little knowledge required
- no intellectual property or proprietary products
- significant year to year financial variability
- high employee turnover
- poor industry conditions
- significant legal risks
- possible political regulation
- lack of quality management
- lack of pricing power
- rapidly changing industry conditions
- high annual capital expenditure requirements
- rapid product obsolescence
- no business succession plans, etc.
As the items in the list above grow, so does the likely timeframe to marketability.
For answers to other commonly asked questions about the “greater than two year data” click here. On Friday, March 25 BVR is also offering a free one-hour webinar “Valuation Advisors DLOM Study: Using the Newest Lack of Marketability Discount Data,” during which Pearson will detail all of the new data, its analysis, and its application. CPE credit is available. To find out more or register for free, click here.
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