The use of restricted stock studies is the most cited methodology for quantifying a discount for lack of marketability (DLOM), according to the results of our DLOM survey. Of those who use this methodology, about two-thirds say they use the “benchmark average approach,” while the other third say they use the “restricted stock comparative analysis approach (RSCAA).”

Red flag: Is the benchmark average approach an in-depth analysis? The court in one case said this: “[The valuation expert] simply lists the average discounts observed in several such studies, effectively asking us to accept on faith the premise that the approximate average of those results provides a reliable benchmark for the transferred interests.” [Peracchio v. Commissioner, T.C. Memo. 2003-80 (Sept. 25, 2003)]

The late Tax Court Judge Laro spoke on this topic and said that more analysis is needed on data that must be current. The analysis should tie the restricted stock study to the characteristics of the subject company. The most widely used restricted stock transaction database is the Stout Restricted Stock Study (formerly FMV Opinions), which is updated quarterly. The database (used by 39% of survey respondents) includes the Stout Calculator, which embodies the RSCAA, and is driven by the financial characteristics of the subject company as well as the volatility of the market.

We received 96 responses to the survey, which was conducted from September 19 to September 28. We’ll have more results in next week’s BVWire, and we will prepare a document with the full results that will be available to everyone. Thank you for your participation!