DLOM survey: Preliminary results and comments

BVWireIssue #170-1
November 2, 2016

Restricted stock studies and pre-IPO studies remain the most cited methodologies for quantifying a discount for lack of marketability (DLOM) according to preliminary results of our DLOM survey. Other early results:

  • Nearly all of the respondents quantify separate discounts for a minority interest and lack of marketability when the valuation requires both.
  • The vast majority of participants say that they “routinely” consider the 10 Mandelbaum factors in determining DLOM. Of all the factors, “restrictions on transferability” and “dividend policy” are the two that nearly all respondents consider. The factor least cited was “costs associated with a public offering.”

The overall results so far are very close to the results from the last survey we did (in 2013). But compared to our 2009 survey, slightly fewer respondents now cite restricted stock and pre-IPO studies and more say they use other methods, such as options modeling. Again, these are preliminary results, and we’d like to get some more responses before closing the survey.

Good insights: We also asked respondents for some general remarks about DLOM, and here is a sampling of their comments so far:

  • “You should always use two methods to determine DLOM. Moreover, you should always ask yourself after you determine the post-DLOM price per share if the value is too high or too low.”
  • “I don’t agree that a DLOM applies automatically to a controlling interest in an unlisted company, especially a 100% interest. Some argue that you can’t convert to cash in three days hence a discount applies—but if the company is profitable and cash flow positive you do get some liquidity via the return on investment to offset the time delay.”
  • “I believe more focus should be put on rates of return for fractional interests and not just rely on what some studies say the discount should be. Many analysts just quote studies without understanding the effect of the size of the discount on the rate of return.”
  • “Despite all these methods, application of DLOM is still a very subjective thing.”

If you haven’t yet taken the short survey, please do so by clicking here. The survey will remain open a short while longer, and then we will present the full results. Also, on December 8, BVR will present a special four-hour DLOM Day: An Advanced Workshop.

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