The working paper by Dr. Robert Comment (Johns Hopkins Univ.), “Business Valuation, DLOM and Daubert: The Issue of Redundancy” has caused a small firestorm within the BV community regarding the determination and application of the discount for lack of marketability (DLOM). At the most recent annual AICPA National BV Conference in Las Vegas, Dr. Shannon Pratt (SPV) challenged Comment’s assertions, analysis, and conclusions. Among his criticisms:
- Comment derives his data from 551 fairness opinions, typically governed by dissenting shareholder statutes and applying the “fair value” standard, the majority of which preclude marketability discounts. “The basic foundation of his study is flawed from the get-go,” Pratt said.
- Comment maintains that fairness opinion values presumptively concern competitive, fair market value prices. Pratt says that “all of Comment’s transactions are control transactions in public companies, which, by their nature, would not be expected to have any DLOM.”
- Comment says that owners of private companies have demonstrated a continued willingness to incur IPO flotation costs, expressed as a percentage of the post-IPO market value, which indicate the “maximum tolerable private company discount” of roughly 6%. Pratt says: “This statement makes the outrageously naïve assumption that any company can go public at any time.”
- Comment ultimately concludes that any DLOM is likely to be redundant to the size discount and is “obviously improper under Daubert.” Pratt’s reply: “As I have said many times, investors cherish marketability.” As a result, “they extract a much higher cost of equity capital for lack of marketability [in private company interests] compared with publicly traded companies.”
- When asked whether Comment’s paper would pass Daubert, Pratt simply says: “No.” He also refers interested appraisers to his article, “In Defense of Discounts for Lack of Marketability,” published in the Fall 2010 Business Valuation Review.
Comment responds. In the interest of furthering professional education and debate, we’ve extended Dr. Comment an opportunity to defend his DLOM conclusions. Don’t miss the first BVR webinar of 2012, Why Your DLOM Is Vulnerable to a Daubert Challenge, featuring Dr. Comment on Thursday Jan. 12, 2012.
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