Pre-IPO discounts useful in a variety of valuation settings

BVWireIssue #102-5
March 20, 2011

During last week’s BVR webinar “Discounts for Lack of Marketability – Beyond 2 YearsBrian Pearson (Valuation Advisors LLC) discussed a major addition to the Valuation Advisors Lack of Marketability Discount Studya dataset of discounts where pre-IPO transactions that are more than 2 years before an initial public offering.  These discounts were taken from the same sources which provided the original data included in the VAL database.  “Essentially, the further the transaction is from a liquidity event (i.e. the IPO), the higher the discount for lack of marketability.”

Pearson outlined situations in which a timeframe for a pre-IPO discount greater than 2 years would be useful:

    • Lack of profitability
    • Low margins
    • High levels of competition
    • Low industry barriers to entry
    • Low capital requirements for new entries
    • Little knowledge required to compete
    • No intellectual property or proprietary products
    • High year to year financial variability
    • Poor industry conditions
    • Significant legal risks
    • Potential political regulation
    • Lack of quality management
    • Lack of pricing power
    • Rapidly evolving industry conditions
    • High capital expenditure requirements
    • Rapid product obsolescence
    • No business succession plans
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