DLOM—still a ‘controversial’ aspect of valuing PE interests

BVWireIssue #111-2
December 14, 2011

“Can I still apply a marketability discount for an unquoted company after calculating its Attributable Enterprise Value to determine its current Fair Value?” That’s one of the frequently asked questions regarding application of the International Private Equity and Venture Capital Valuation guidelines (IPEV). The answer:

The IPEV Guidelines suggest when comparator multiples are used from quoted companies, that an adjustment may be needed to reflect the difference between the liquidity of the shares being valued and those of the comparables. However, an adjustment for marketability should be applied to the multiple instead of the Enterprise Value in determining Fair Value. . . . A further marketability discount would not be appropriate because the concept of fair value assumes a hypothetical sale at the Reporting Date.

“I think in the past, there was double dipping with regard to the DLOM,” comments Jamie Buress (Duff & Phelps), who answered BVWire’s query on the topic. “The IPEV guidelines wanted to make sure this did not happen, so they suggest [discounting for DLOM] at the enterprise level—for example, by adjusting the multiple downward, instead of taking the discount at the end, at the entity level.” This is the aspect of the IPEV guidelines that Buress still sees as “controversial.” The reason: “Most of the empirical evidence on discounts has been done at the equity level, [but] in practice, I think most valuation analysts take the DLOM at the end, at the equity level.” Should practitioners adapt their approach to PE and VC valuations—or should the IPEV amend its current guidelines? Email your comments to the editor.

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