The Summit hallways “buzzed” with Laro’s remarks, with some practitioners wondering how the IRS could successfully challenge the same methods that its own experts and examiners use. At the same time, they agreed with Laro’s assessment that the conference sessions could “permanently change the direction of DLOM.”
To make best practices more transparent, Jim Hitchner moderated a three-hour discussion by Bob Duffy, Linda Trugman, Kevin Yeanoplos, and Jay Fishman in which each panelist independently prepared—and defended--their DLOM conclusion from a Mandelbaum-based case study.
The experts largely agreed that the commonly-applied DLOM analyses “have served us well and continue to do so,” Hitchner said, with somewhat more consistent emphasis on the restricted stock studies. But, “the future of valuation—not just DLOM, is option analysis,” he said, and Duffy agreed. “We started including option models in our reports—and I strongly urge you to do the same,” he said. Not only does the report become an expert’s entire direct testimony in litigation, but given the lag time between the valuation and trial—which may be years, by the time the expert takes the stand, “I guarantee you, everyone will be using the option pricing models,” Duffy said. “They will be state of the art.”
Each panelist offered similar strong opinions. For instance:
- Trugman’s shop is currently working on a new analysis of the data that shows “discounts are not really correlated with size or growth or other operating measurements” in many of the commonly used studies.
- Yeanoplos urged attendees to take “a much closer look” at the QMDM. “It’s internally consistent with the assumptions in your income approach,” so that at least any subjective factors remain constant—making it a very strong comparative tool when combined with other methods.
- “Do not use any of these methods unless you understand their strengths and their weaknesses,” Fishman cautioned. “Don’t go disarmed into the DLOM wilderness.
Did the experts reach any consensus? Based on the same set of facts—but applying various methodologies, Duffy and Trugman concluded a 40% DLOM, Yeanoplos was at 45%, and Fishman at 55%. To learn how they all got there, read a complete report in the next (November 2009) Business Valuation Update™.
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