The estimation of a discount for lack of marketability (DLOM) is under increased scrutiny by users of valuation reports, the IRS, and others. Many valuation experts use restricted stock studies when developing a DLOM. However, certain characteristics of the issuer of the restricted stock can impact the discounts in the studies. A new model, the Restricted Stock Study Quintile Calculator (RSQC), is designed to adjust for those characteristics in order to develop a relevant sample for the subject company. The model is included in the VPS DLOM Guide and Toolkit by Jim Hitchner, Jim Alerding, Josh Angell, and Kate Morris.
How it works: The RSQC model permits estimation of a DLOM for a subject company by adjusting restricted stock discount data for differences in volatility, holding period, dividends, and other factors. The source of the restricted stock discount data is the Stout (FMV) Restricted Stock Study. The model matches the subject company to a quintile of restricted stocks from the study using criteria such as market value, revenues, profitability, etc. The median DLOM of the selected quintile from the RSQC, the restricted stock study equivalent discount (RSED), serves as a baseline estimate of the subject company’s DLOM. The RSED provides a preliminary estimate of the DLOM for the subject company given its illiquidity, volatility, holding period, dividends, and other criteria. The RSED may be further adjusted for differences between the subject company and the selected quintile for certain criteria using a regression analysis of the Stout (FMV) database, option pricing models, and/or a Mandelbaum factor analysis.
An article in the November 2017 issue of Business Valuation Update illustrates a restricted stock study quintile analysis based on a hypothetical case study (a 20% noncontrolling ownership interest in a non-dividend-paying company).
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