Critics of the FMV Restricted Stock Study (and restricted stock in general) make three common mistakes, says Lance Hall (FMV Opinions Inc.), responding to a posting by what he says was an “uncredentialed intern at a Florida accounting firm,” featured in last week’s BVWire.
“First, they object to the fact that the underlying data are not exactly like the company they are trying to value. Welcome to valuation,” Hall says. Second, critics “assume that you need a statistical regression formula with a 90% accuracy to determine the discount. It doesn’t exist. Welcome to valuation.” Given these mistakes, the third is to use models for which there is no empirical proof and “no exactly alike companies,” Hall says, explaining:
In other words, the strict standard by which critics judge restricted stock studies [do not apply to] the tools they prefer, especially for those favoring methodologies like option pricing models and the QMDM. Asking the obvious, if liquid options are bought and sold on liquid stocks, what does an option model tell you about liquidity? Answer: Nothing. The QMDM is not based on empirical data and cannot be proven (or disproven) empirically.
“While we would all like the magic formula to determine a discount for lack of marketability that could be proven empirically, that magic formula doesn’t exist and will never exist,” Hall concludes. “For those of us in the valuation profession, we must continue to do what we have always done, and that is perform an analytical, thoughtful, and well-reasoned analysis.” Welcome to our world.
We’ve posted Hall’s complete article, including why valuation professionals still favor restricted data as the “number one” tool in deriving the marketability discount, here.
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