“Can you tell me if there is any research or database quantifying discounts for lack of marketability (DLOM) for controlling interests?” asks subscriber Dennis Kramer (William Greene & Co., Katonah, NY).
“Courts and various authors—including Shannon Pratt—agree that while the pre-IPO and restricted stock studies are appropriate in estimating DLOMs for minority interests,” responds Alina Niculita (Shannon Pratt Valuations), “they may not be appropriate for estimating DLOM for controlling interests.”
Lance Hall (FMV Opinions, Inc.) agrees, but points out the question is common, as it’s “virtually impossible” for investors to turn a 100% controlling interest into cash within three business days, which prompts many to believe a DLOM applies. However, “as the transaction price reflects the normal selling period commensurate with a sale of just such a company,” the more common answer is no DLOM applies to controlling interests, unless “you use data other than a comparable sale or discount rates derived from public company returns.” In cases where DLOM may apply to controlling interests, remember “restricted stock will probably overstate the discount.”
And as of today, Niculita says, “There is no empirical transaction database from which to draw guidance for quantifying DLOM for controlling interests.” But there is BVR’s Guide to DLOM Case Law (2006 edition), a current, best-selling compendium of nearly 200 court cases involving marketability discounts for minority/controlling interests in estate and gift, marital dissolution, ESOP, etc. To order a copy—which comes with a searchable CD, click here.
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