DLOM survey reveals increasing consensus on the best practices for calculating discounts

Last week’s survey on current methods for calculating the discount for lack of marketability (DLOM) garnered more responses than any other BVWire poll. Highlights include:

• Separate discounts: Nearly all (98.1%) of the respondents quantify separate discounts for a minority interest and lack of marketability when the valuation requires both.
• Majority apply Mandelbaum: The vast majority of participants (83%) say that they “routinely” consider the ten Mandelbaum factors in determining DLOM. Many prefer not to cite the specific case, but consider the factors “a reflection of sound valuation process… and the written responses [to the survey] show that even the respondents who don’t explicitly consider the Mandelbaum factors do so implicitly in many instances.”
• Transfer restrictions are key. Of all the Mandelbaum factors, “restrictions on transferability” is one that nearly all (98.7%) respondents consider. The factor with the lowest response rate (39.7%) was “costs associated with a public offering.”
• Restricted stock studies most common. Nearly 90% of respondents rely on restricted stock studies, making this the most commonly used DLOM method, followed by IPO studies (52.3%) and “other” (26%) Only 18.2% rely on DCF methods (QMDM, e.g.) or option pricing models (16.9%). Three respondents reported using LEAPS, an option method, in their comments.

But have you considered? “For investment-oriented entities (FLPs, etc.), it may make sense to aggregate a combined discount for minority interests and lack of marketability, due to data limitations on estimating separate discounts,” say Arthur Rosenbloom and Bala Dharan, both with Charles River Associates, who drafted the survey. “A minority interest generates impaired marketability. We use the two only for convention; they are multiplicands and we end up with one discount.” Further—although shares of a private company will most always lack marketability, only some shares lack control. “Hence the two discounts are always separate issues.”

More insights from Rosenbloom and Dharan—including estimating DLOM for pass-through entities, and the enduring popularity of restricted stock and IPO data, despite some degree of discredit among the courts and IRS—appears in the October 2009 Business Valuation Update.