Ronald Seaman’s new study, “Minimum Marketability Discounts–4th Edition: A Study of Discounts For Lack of Marketability Based on LEAPS Put Options,” shows that costs of price protection/discounts vary by date and do not remain constant in size over time. That data further suggest a discount for lack of marketability analysis should be valuation-date specific, Seaman explains in his recent Business Valuation Update™ article. Additional findings:
- Holding period: The median cost/discount for all companies in the 2006 study was 13.9% for the 18-month LEAPS put option and 17.4% for the 30-month option, an increase of 3.5%. In 2008, the median cost for all companies increased to 33.5% for the 14-month option and 40.6% for the 26-month option, an increase of 7.2%.
- Industry: Discounts vary by industry. The differences are more pronounced as the definition of the industry becomes more specific or more detailed.
- Company size: Company size has a clear and major affect on discounts: The smaller the company, in revenues or assets, the larger the discount. In November 2008, discounts for companies with less than $1 billion in revenues often were from 35% to 50%.
- Company risk: As was the case in the 2006 survey, company risk has a major influence on discounts. The greater the risk, as measured by the company’s beta, the greater the discount.
For your own copy of Seaman’s article, visit BVR’s Free Resources page.
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