A valuation expert recently told us that, in an engagement he just completed, he did not use any of the pre-IPO studies in developing a discount for lack of marketability (DLOM). It was not that he took a look at the studies and then decided not to consider them—he simply didn’t go there at all. His reason? The criticisms these studies have received over the years. But experts should think twice about automatically dismissing this approach. Many of the criticisms have been rebutted, authoritative valuation textbooks and course offerings support the use of pre-IPO studies, and they have made a comeback in the courts.
Biased data? One common criticism is that the pre-IPO studies are biased. That is, they only contain data on IPOs that were successful and there are no data on firms that tried but did not complete an IPO. Excuse us, but couldn’t you say the same thing about other transaction databases experts use all the time? Take DealStats, for example. It contains transactions of private companies that actually sold. There are no data about companies that tried to sell but could not. What were those companies worth? Would they have had very different multiples that would change my analysis? Who knows? The point is, this kind of “bias” exists in many sources of data valuation experts use, so is this criticism fair?
As with any approach or data, pre-IPO studies can be a valuable tool—if used wisely, i.e., if you understand the underlying data and the issues and limitations of the data and address all of that in your analysis. Of course, this approach may not be appropriate for your subject company, but you won’t know that unless you look.
Free webinar: Tune in today (January 29, 10 a.m. PT/1 p.m. ET) to Pre-IPO Revival: Up Your DLOM Game in 2020, a free webinar that will explore the largest pre-IPO study and will discuss the misconceptions about these data. If you can’t attend live, a recording will be made available (also free of charge).
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