Little-known feature of the VA pre-IPO study

BVWireIssue #208-3
January 22, 2020

discount for lack of marketability (DLOM)
pre-IPO, discount, discount for lack of marketability (DLOM)

Did you know that the Valuation Advisors Lack of Marketability Pre-IPO Discount Study also contains convertible preferred stock (CPS) transactions? Many valuation experts may not be aware of this, says Brian Pearson (Valuation Advisors) in an interview in the February 2020 issue of Business Valuation Update. “These pre-IPO transactions are often with very sophisticated investors, and therefore there are lots of arm’s-length negotiation of price and terms on these investments,” he says. “I think they provide a good floor for discounts for the time period to liquidity that the BV professional is considering. This is especially true since oftentimes they do offer the holder some form of income in the form of dividends. Also, the CPS transactions are useful if you are valuing an entity such as an LLC or FLP that may hold primarily investment securities. “The income nature of CPS offers a good reference point for the discount for lack of marketability (DLOM) of such entities,” he says.

Free webinar: Pearson will conduct a free webinar, Pre-IPO Revival: Up Your DLOM Game in 2020, on January 29. Pre-IPO studies have withstood criticisms and court challenges to remain a viable method for developing a DLOM. A 2018 BVR survey showed that 38% of respondents use pre-IPO studies for estimating DLOM, second only to restricted stock studies.

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