Can you apply a DLOM under the asset method?

BVWireIssue #95-4
August 25, 2010

Kevin Yeanoplos, James Lurie and Chris Mercer’s discussion during the recent BVR webinar “Everything You Always Wanted to Know About DLOM But Were Too Afraid To Askelicited several interesting questions, one of which was:

What do you do in a situation where you're valuing a small privately held company and the asset approach is used and not a cash flow method? How do you apply a DLOM?

Mercer replied:

“Let's assume that the asset that is being valued is a basket of marketable securities or real estate or art – it really doesn't matter.  We get the market values of those assets under the asset method and we value the financial control level of the partnership using the asset method.

It's very difficult to use the asset method to value an illiquid interest. So what we would do in valuing the interest, the 3 percent partnership interest, for example, is value it based on an income approach.  What are the benefits to be derived from the 3 percent partnership interest that I just defined over a reasonable expected holding period for that investment until liquidity is achieved, or until the partnership is dissolved, or until it's sold, or until the managing partner decides to liquidate the securities and make a distribution?

So those are the only cash flows that are going to be obtainable to the investors so we use the income approach and value the illiquid interest, but we use the asset approach to value the enterprise.”

For more information about the webinar click here.

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