“DLOM is a crapshoot,” says one participant to our latest survey on DLOM methods. According to another, “DLOM studies rarely provide data that I feel comfortable in using in my practice of valuing closely held entities.” Voicing similar frustrations, a third says: “It would be nice if the profession could come to an agreement as to which of the DLOM approaches provides consistent discounts.”
At the same time, one participant posits using the Partnership Profiles data extensively for FLP or asset holding valuations and the FMV Restricted Stock data and a “personal variation of QMDM” for nearly all operating business valuations. But compare these comments from other respondents:
- “Despite the constant drumbeat to the contrary, benchmarking from restricted stock studies is still the most sensible method.”
- “I usually try to use the Partnership Profiles methodology because I am very comfortable with its validity. The QMDM is a close second. [I do not use the] other methods … because either [they] just do not really reflect what I am valuing or they are too ‘spacy’ to try to apply.”
- “All of the methods are flawed in some way (some more than others). So at the end of the day, no matter what method you use, it still comes down to the subjectivity of the appraiser. So why not skip the facade of using flawed approaches and just explain why you selected the particular DLOM and back up the specifics of the actual number with ‘professional judgment’?”
Still others want to see more emphasis on statistical approaches. “Why is a linear regression model comparing restricted stocks to public stocks not given much emphasis in determining the DLOM? Most reports use the mean discount then subjectively adjust the discount based on these factors. Research that I have read shows that the discount is substantially less using least squares regression and has a high R2, yet this approach seems to gain little support. Any ideas on why this is?”
Yet the increasing multiplicity and complexity of methods (such as the Asian put model) reveal “sophistication without history of use,” comments a participant. “It sounds like quants are trying to take over the profession and win cases with fantastic Rube Goldberg methodology. It reminds me of derivatives where you have to pay the source bank for the value.”
Finally, even if BV appraisers could agree on a consistent, credible approach, most have heard the rule of thumb suggesting they spend 20% to 30% of a total engagement on the DLOM determination. “I don't disagree in theory,” says one survey participant, “but when you are doing small valuations of closely held and family owned businesses, the added cost to spend that much time would cause clients to not get the [complete] work or go elsewhere.”
One thing is certain: The debate will continue. Writing to us directly, Bruce Johnson (Munroe, Park & Johnson) notes the survey omitted the “empirical method” as an option, also called the Johnson/Park approach, which he recently presented in a BVR-sponsored webinar, “How to Quantify and Support Your DLOM Using Rates of Return.” “Based on the feedback from people at courses we teach, a lot of people use it,” he says. “It has also been successfully used in court. It may be worthwhile to include it in the survey next year, as it will probably be presented at the upcoming ASA and AICPA conferences.”
DLOM discussion continues this week: Tomorrow, January 31, don’t miss John Stockdale (John Stockdale Business Valuations) as he presents the fourth and final installment of our Advanced DLOM Series, “A Review of DLOM Volatility and Option Model.”