Marketability discounts trending downward

BVWireIssue #68-2
May 14, 2008

Since its creation in the mid-1990s, the Valuation Advisors DLOM Studyhas grown to encompass over 3,800 Initial Public Offering (IPO) transactions, updated monthly, making it the largest database for assisting in the calculation of discounts for lack of marketability (DLOM).  The data are parsed into four, three-month pre-IPO timeframes up to one year and a 1-2 year pre-IPO group, and are searchable by transaction type, which helps current as well as historic analyses.  Of late—during the past five to six years, discounts have trended down slightly, according to an article by Brian Pearson, Valuation Advisor’s creator, especially in the earlier timeframes—the zero-to-three months and four-to-six months.  A couple of reasons may explain the trend: First, from the mid-1990s up through the crash of the tech-market, stock prices in private companies were changing relatively quickly, Pearson says, reflecting what Al Greenspan called  investor “exuberance” and which IPO prices also reflected.  These past four or five years have seen less exuberance, perhaps, and more of a reality-check on prices.

“The other thing that might account for a little bit of the differential is…there’s been a better attempt, certainly from the Securities and Exchange Commission’s standpoint, at trying to monitor…so-called cheap stock,” Pearson adds.  “In our database, we account for that already so we make an adjustment for it if there’s a compensation adjustment.  In other words, if there’s cheap stock issued and it’s an option or a stock, either way, we account for that in calculating the discount.”   Pearson’s article is now available as a Free Download from BVResources.  It’s just one of many in the newly updated articles and case abstracts in BVR’s Guide to Discounts for Lack of Marketability, 2008 Edition.  To obtain a copy, click here.

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