In our continuing coverage on determining the discount for lack of marketability (DLOM) (see BVWire™ #82-1), we’ve identified five methodologies that valuation practitioners most commonly use. The survey is sure to provide provocative discussion and debate at the 2nd Annual University of San Diego School of Law, Business Valuation and Tax Conference on October 9th. Register now to take advantage of the early-bird price discount, ending September 9th.
The top DLOM methodologies include:
- Restricted stock studies: Comparing the price of restricted shares in a public company versus their unrestricted counterparts; e.g., The FMV Restricted Stock Study™, Management Planning, Inc. Study, and Liquistat Database study.
- IPO studies: Comparing the price of a share before and after an Initial Public Offering (IPO); e.g., the Robert W. Baird studies, Willamette Management Associates studies, and Valuation Advisors’ Lack of Marketability Discount Study.
- Discounted cash flows models: e.g., the Quantitative Marketability Discount Model (QMDM) and the Tabak model.
- Options valuation models: Valuing the restriction on marketability using an options valuation or risk management framework (e.g., the Chaffe, Longstaff, LEAP, Finnerty, and NICE models).
In addition to these empirical methods, valuation practitioners frequently refer to Mandelbaum v. Comm’r (T.C. Memo 1995-255)(June 1995), not only for its ten factor analysis but for the Tax Court’s rather critical response to all the “charts, graphs, factual data, testimony, and expert opinion” that it faced in that case:
We are not bound by precise appraisal formulas. As the Court has previously observed, the valuation of property is an inexact science, and, if not settled by the parties, must be resolved by the judiciary by way of ‘Solomon-like’ pronouncements. [. . .] Expert testimony sometimes aids the Court in determining valuation. Other times, it does not.
Which do you most commonly use? To find a method amidst the DLOM madness, we’ve set up a quick e-survey to poll valuation practitioners. The five questions won’t take you more than five minutes to answer—and we’ll publish the responses in upcoming ‘Wire. We’ve also asked CRA International experts Arthur Rosenbloom (Senior Consultant, New York) and Bala Dharan, (Vice President, Boston), who crafted the survey, to provide further insights and an overview on the state of DLOM, including the most critical question of all: is there a sufficient financial and theoritcal basis to apply DLOM? To participate in the DLOM survey, click here.
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