We’ve also been following the series on the discount for lack of marketability—up to five installments now—by Chris Mercer (Mercer Capital). “The conceptual logic regarding the income approach is difficult to refute,” Mercer says, in Understanding the Largest Valuation Discount #5: The Income Approach to Marketability Discounts (DLOMs):

What can cause expected cash flows to minority shareholders to be less than the expected cash flows of the enterprise? What can cause the expected growth in value, from the minority shareholder’s perspective, to be less than the expected growth in value for the enterprise from the viewpoint of a purchaser today? What factors create additional risks for minority shareholders, in addition to the need to bear the risks of the enterprise?

“The answers to these questions lie in a myriad of factors influencing marketability,” Mercer writes, “many of which were summarized in the IRS DLOM Job Aid. With the background laid for future discussion, we move in the next post to a discussion of the market approach when valuing illiquid minority interests, to be followed by an overview of the IRS DLOM Job Aid.” The series will conclude by revisiting the marketability discount from a conceptual basis. “With our growing base of knowledge and understanding, we will then begin to examine the various methods used by appraisers to develop marketability discounts, analyzing them in light of [our] conceptual understanding.”