Is there a distinction between discounts for lack of liquidity (DLOL) and discounts for lack of marketability (DLOM)? Moreover, what is the maximum DLOM today? The standing room only crowd at Dr. Ashok Abbott’s session at this week's FAE/BVR 2009 Business Valuation Conference in New York City was hungering for a cogent methodology to fully measure, without double counting, discounts resulting from today's volatile marketability and liquidity situation.
Indeed, the recession has increased discounts to the point that, for many current valuation engagements, they are the single most material conclusion. Although they’ve improved in the last months—particularly for small cap companies—discounts for lack of liquidity are still much higher than they were in 2005 or in other historically high periods, Abbott explained at Monday’s meeting. Abbott, an Associate Professor of Finance at West Virginia University and Senior Appraiser at Business Valuation LLC, said this fact makes life extremely difficult for anyone calculating DLOM or DLOL for current valuation dates.
In addition, rapid changes are continuing. “A small cap large block of stock that might have had a DLOL of around 40% in November 2008 is now showing 20% using current public market data,” he explained.
Because of the unprecedented volatility in this major valuation factor, BVR is hosting a special recast on Thursday, May 21, at 10:00am PT/1:00pm ET of Dr. Abbott’s highly successful session, Liquidity Crisis and Valuation Practices—Estimating the Cost of Liquidity. A live Q&A with Dr. Abbott will follow the presentation. Two CPE credits are available for this 100-minute teleconference. Click here to register.
Want additional insights on how to quantify liquidity discounts? To download a copy of Dr. Abbott’s 2007 article, “New Abbott Analysis Aids Valuators in Assessing Liquidity Discounts,” visit our Free Resources page. You can also check out the Abbott Liquidity Factor in the Business Valuation Update™. The Abbott Liquidity Factor is a measure derived from a liquidity database developed by Dr. Abbott, which tracks directly observable data for common stocks of publicly traded securities from the primary national exchanges (NYSE, AMEX, and NASDAQ).