“I’ve just finished spending several hours participating in a lively online discussion about discounts for lack of marketability and controlling interests,” writes Rick Warner (Great Lakes Valuation). “But how many of you have heard of the DLOU: ‘discount for lack of understandability’?” That’s the adjustment judges often apply after reading an appraiser’s opinion, Warner explains. “And you can see how this might happen.” The judge receives two well-reasoned reports from otherwise qualified individuals. Here’s what the appraisers wrote about the marketability discount:
We relied upon the total revenues of the company issuing the restricted stock as a proxy for “size”; we then sorted the 597 transactions into quintiles and for each quintile determined the median size and median discount as of the transaction month as reported by the [blah-blah-blah database]. This analysis demonstrated that as the revenues of companies issuing restricted stock increases, the size of the discount associated with the restricted stock decreases.
What the appraiser meant:“Larger companies have smaller discounts than smaller companies.”
What the judge read: “Die großer Gesellschaften haben kleiner Diskonten als kleiner Gesellschaften.”
Read the rest of what Warner has to say about the little-known (but unfortunately oft-applied) DLOU at BVWire News. Followers can enjoy more wisdom from Warner along with “real-time” updates and reports from the BV world.
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