“Liquidity has the potential to be a more important factor in determining financial market prices than even risk and return,” according to Prof. Francis Longstaff, who joined Prof. Ashok Abbott, Marc Vianello, and moderator Ron Seigneur in what capped a week of webinars, this one on “Exploring the Longstaff Model and Abbott Liquidity Factor for Enhanced Marketability Discount Determinations” by the AICPA’s FVS Section. Polling continued apace, with a clear majority (64%) of listeners acknowledging the difference between a discount for lack of liquidity and a discount for lack of marketability (DLOM). Vianello advocated the Longstaff methodology, which calculates the upper bound of the cost of liquidity restrictions based on recognized methods of pricing options contracts. It yields an objective DLOM estimate for each valuation engagement by using guideline price volatility and the projected time between the valuation date and the company sale. When applying these theories, however, Abbott emphasized that “one size does not fit all.” Blanket approaches using historical averages are not sustainable, and—like so many applications in business valuation—the appraiser must perform case-specific analysis, dependent on the facts and circumstances.
Another live survey question: How much weight do you give to restricted stock and pre-IPO studies in estimating the discount for lack of marketability for a privately-held company? Nearly a quarter of listeners (22%) replied they weight these studies less than 25%, while just about the same number (21%) weighted them between 25 and 50%. Over a third (37%) of respondents weighted them between 50 and 75% and a fifth (20%) gave them a weight greater than 75%.
To learn more about the Abbott Liquidity Factor, read “New Abbott Analysis Aids Valuators in Assessing Liquidity Discounts” at BVR’s Free Downloads page, or click here to request more specialized information. The FMV Restricted Stock Study™ is available here and the Valuation Advisors’ Lack of Marketability Discount Study™ (a pre-IPO study), here.
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