“Outdated studies” and “emerging quantitative methods” are some reasons why young valuation practitioners are questioning the traditional methodologies for estimating discounts for lack of control and marketability (DLOC and DLOM). This was revealed during a Young Valuation Analysts Panel session at NACVA’s recent Business Valuation & Financial Litigation Super Conference. Challenging the status quo is one way the profession can evolve its thinking about methodology and practice.
The issue came up when a question was posed to the panel about the obstacles and challenges that they see in the profession over the next five years. In addition to examining new methods for estimating discounts, the panel mentioned M&A uncertainty amid difficult economic conditions and educating young professionals about the existence of business valuation as a profession. The panel included Todd Kutcher (Reliant Business Valuation), Coleton Benfatti (The Red Maple Group), and Ryan McKeon (Doeren Mayhew), and the moderator was Karen Kaseno (The Kaseno CPA Firm APC).
Current methods: Preliminary results from BVR’s Benchmarking Survey show that the FactSet Mergerstat/BVR Control Premium study is currently the most cited source for determining a DLOC, cited by 50% of respondents. As for DLOM, the traditional methodologies continue to be the most used, notably: restricted stock studies (53% use the Stout study and calculator, 34% use other historical studies); pre-IPO studies (26%); and Mandelbaum factors (66%). Thirty percent of survey respondents cited the use of option price modeling methods, which is up from 20% in the prior survey (2018).
Extra: In a separate session, Dr. Ashok Abbott discussed the Margrabe options approach to DLOM and offered attendees access to a new DLOM calculator he is developing that is in beta testing. You can access it at dev.optionmodeldlom.com. Dr. Abbott would like feedback on the calculator, including suggestions for improvements, additional features desired, and possible extensions. His contact info is on the calculator.