Nancy Fannon (Fannon Valuation Group) recently told BVWire that “Dr. Robert Comment (Johns Hopkins University - Carey Business School) has written what I think is an important perspective regarding redundancy that exists in the large DLOM adjustments many appraisers take in their valuations.” The abstract from his paper “Business Valuation, DLOM and Daubert: The Issue of Redundancy” reads:
“It is not well known that core valuation methodologies such as DCF analysis have the effect of discounting the future cash flows of small businesses substantially, generally by 40% to 60%, dollar-for-dollar, for lack of size alone. Because there is a strong empirical relation between size and liquidity, there is a great likelihood that any supplemental discounting for illiquidity will be redundant and entail double discounting. Accordingly, the large liquidity discounts or DLOMs that are accepted practice in business valuation and that have been embraced by many judges presumptively violate the Daubert requirement for reliability.”
“While this may cause a firestorm, I think it is an important discussion to begin to have,” Fannon says. “Dr. Comment offers the perspective, often forgotten, of where we started from to begin with--that is, the magnitude of discount already embedded in our core valuation methodology.”
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