Empirical data are the backbone of defensible business valuations, but there are strengths and weaknesses with all data. The key is to acknowledge those strengths and weaknesses, understand the data you are using, and make adjustments when necessary. A good example is pre-IPO data used to develop a discount for lack of marketability (DLOM). These data have been subject to criticisms (and so have restricted stock studies), many of which have been rebutted, but valuation experts continue to use pre-IPO studies. The last survey BVWire did showed that 43% of respondents use pre-IPO studies for estimating DLOM (second behind restricted stock studies). In court, performance has been mixed. Pre-IPO studies took a hit back in 2003 (in the McCord case) but rebounded in 2006 (with the Bergquist case), so you’ll find it being used in current case law.
Here’s the point: Data “is what it is,” meaning they may not be perfect, but having some useful data is better than none at all. The key is to understand the underlying data and deal with the weaknesses—don’t try to hide them because the opposition will surely point them out. Also, do not rely on one data source or method. Assemble evidence from various sources and integrate it into your estimate. One more thing: Don’t simply use averages without doing any analysis of the underlying data and adjusting when necessary.
Extra: BVR will present a free webinar, Pre-IPO Revival: Up Your DLOM Game in 2020, on January 29, conducted by Brian Pearson of Valuation Advisors LLC, which maintains an online database of over 16,000 pre-IPO transactions.
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