: I can't go on like this.
: That's what you think.
—Samuel Beckett, Waiting for Godot
If any consensus came out of our last survey on the discount for lack of marketability, it was to acknowledge the frustrating lack of consensus. Or as one participant put it:
I am almost to the point of wishing that the IRS would just promulgate certain standardized discounts … so we could just use them for tax-basis BV reports. We would all benefit from this, financially, and our profession would achieve some uniformity. Right now, the legal field, the courts, and other professionals are frustrated with our profession's inability to arrive at an acceptable methodology. The mere fact that [the survey] lists 21 approaches to determining DLOM is representative of a broken theoretical model.
You don’t have to wait for the IRS. He’s no longer a chief engineer with the IRS, but Michael Gregory was the chief author of its DLOM Job Aid, which examines 18 approaches to determining the discount (and which furnished the basis for our survey choices, which Gregory also helped construct). The IRS’s comprehensive overview is worth reading, he says, but analysts should make sure to note its caveats, its standard document request and report writing components, and its expansion of the 10 Mandelbaum factors to 33.
Based on his 28 years with the IRS and the past two years in the private sector—and keeping in mind this is his own opinion—Gregory currently recommends a tripartite approach to determining DLOM: 1) a restricted stock analysis adjusted by the expanded (30+) subjective factors in the IRS study; 2) private placement data (from FMV Opinions, Stage 1, or Pluris) as adjusted by a similar, expanded subjective analysis; and 3) any method that makes sense and can be supported by the facts of the case and the type of valuation. The appraiser should then reconcile the approaches with sufficient explanation in the report. For a complete training pack from Gregory’s presentation, “What Business Valuators Need to Know When Preparing a DLOM for the IRS,” click here.
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