Our most recent online survey on determining the discount for lack of marketability (DLOM) tied with last year’s survey on valuing S corps in terms of the number of respondents. (The No. 1 survey of all time: our 2011 poll on BV professional credentials.) Ranked by the depth and disparity of comments, however, the DLOM survey clearly takes the top position:
- “In general I still think there is a huge gap in understanding how the restricted stock studies relate to privately held interests (especially in smaller companies). Some people blindly complain that the studies are ‘outdated’ and the most recent studies are ‘better without understanding the changes in marketability of 144 stocks [and holding periods] over time. [In addition], most projects simply do not have the budget allowance to do a full-blown detailed and thoughtful DLOM analysis. We just throw lots of studies and numbers out there and conclude something between 25% and 35% to be ‘safe’ and hope that our analysis is never challenged.”
- “I tend not to attempt to get too fine in my ultimate selection of a DLOM. For example, I might conclude that a 25% DLOM is appropriate, but would not arrive at a 23% or 26% or 29%, [without] this otherwise becoming an exercise in angels dancing on the head of pin. I just do not believe that the DLOM factor is susceptible of, or warrants, such fineness.”
- “Appraisers, much like the accountants, have tried to over-engineer the DLOM, and it has given them a false sense of precision. [Rather than build support], they are actually undermining the DLOM because they're ignoring the underlying economic reality. Most of the models, factor analysis, etc. should be abandoned. And I was an engineer before, so I am not biased against mathematical models!”
And the comments keep on coming. Valuation and litigation experts who practice in Daubert jurisdictions should reconcile their various calculation methods and support of the DLOM just as they do the result of multiple appraisal approaches/methods in their primary value conclusions, says Paul French (Lain Faulkner & Co.). “Consider the powerfulness of direct testimony when the valuation analyst says: ‘And the third way, your Honor, that I tested the reliability of my selected DLOM was …’” Given the continuing discussion and debate, we will be featuring two full-length articles on the DLOM in the next two issues of the Business Valuation Update; stay tuned for more details.
Please let us know
if you have any comments about this article or enhancements you would like to see.