Mercer addresses court acceptance of the QMDM for DLOM

BVWireIssue #223-4
April 28, 2021

valuation methods & approaches
risk analysis, discount for lack of marketability (DLOM), quantitative marketability discount model (QMDM)

During a recent BVR webinar, an audience member asked about the track record in court of the quantitative marketability discount model (QMDM) for determining a discount for lack of marketability (DLOM). There have been several cases where the court has taken issue with the experts’ use of the model.

Key point: The developer of the model, Z. Christopher Mercer (Mercer Capital), told the audience that the issues the courts have had were with the experts’ assumptions used in the model and not the underlying model itself. Mercer discussed several cases in which the court took issue with assumptions the expert made, such as Weinberg and Janda. But just because a court disagrees with inputs and assumptions used in a model does not mean that the model itself is not valid. The model has been used successfully in court going back to the 1990s.

First introduced in 1997, the QMDM is a shareholder-level DCF model that values interests in a business in the context of an appraisal of the entire enterprise. The model focuses on shareholder-level cash flows, risk, and growth to reflect what a willing buyer would pay for a willing seller’s interest. The model was discussed in detail during the final part of a three-part webinar series based on the recently released third edition of the book, Business Valuation: An Integrated Theory, which Mercer co-wrote with Travis W. Harms (Mercer Capital), who co-presented the webinar series. They went through several case study examples using QMDM and also addressed some of the criticisms of the model, such as the subjective nature of the assumptions that need to be made.

If you are a BVR Training Passport holder, you have access to archive recordings of the three-part series. The first part gave an overview of the integrated theory, the second part examined enterprise cash flows, and the third part focused on shareholder cash flows and the QMDM.

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