“Our profession has a long way to go in terms of understanding what DLOMs, or marketability discounts, really are,” concludes Chris Mercer (Mercer Capital) in his analysis of BVR’s 2021 DLOM survey. In his blog post, Mercer takes critical aim at the methods most respondents use for developing a DLOM, saying that the survey’s finding that 90% of respondents use restricted stock studies is “astounding.” The survey also found that 43% use pre-IPO studies, which Mercer says is “even more amazing.” He also comments on the use of the Mandelbaum factors and whether it’s appropriate to take a DLOM on a 100% interest in a private company.
Almost a quarter (22%) of valuation analysts polled in the survey say they use the quantitative marketability discount model (QMDM), a model Mercer developed. 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 is discussed in detail in the recently released third edition of the book, Business Valuation: An Integrated Theory, which Mercer co-wrote with Travis W. Harms (Mercer Capital).
In his blog, Mercer says that DLOMs are “not some magic thing that appraisers apply based on ‘Kentucky windage.’ They only exist to the extent that there are differences from the base value in terms of expected cash flow, growth and risk.” He also says: “Thanks to BV Resources for conducting the DLOM Survey and for sharing it with the appraisal profession.” The full survey results, including some interesting comments from respondents, is available if you click here.
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