What is the best holding period in Chris Mercer’s QMDM?


This topic came up for heated debate in a great DLOM Case Study analysis run by Kevin Yeanoplos and Jim Lurie at NACVA.   “In some cases, management may tell you that they’ll never sell, or they may say they plan to sell in two years.  But in other cases, it’s up to our judgment,” Yeanoplos said.

One attendee commented that “if there’s little distribution, the owner is not going to get return on their investment until the asset is sold, so the holding period will be determined by the controlling interest.

Sherrye Henry, Legal Editor for BVR, comments that the holding period is getting more attention everywhere, especially in light of the Tax Court’s recent decision (and the 8th Circuit’s confirmation) in Holman.  "From a legal point of view, it looks like the FMV standard (hypothetical buyer) is being chipped away by the holding period requirements and potential buyers/sellers in the 'real' world," Henry commented.

Another attendee at the session expressed the frustration that “there has not been sufficient discussion in the profession about holding periods.   If we’re going to start using Mercer’s QMDM more frequently [referring to one conclusion from the BVR Tax and Valuation Summit co-sponsored with the University of San Diego School of Law last year, and to be repeated at Georgetown this year November 10], we need to know what holding periods should be, and how to defend our choices.  This is a big problem for the business valuation profession.”

Another attendee challenged any one to defend how they would support a 2 year (as in the FMV Restricted Stock Study), 5 years, or 13 years.   Lurie said, for instance, that if a majority shareholder is 52 and likely to sell at 65, then an argument could be made for a 13 year holding period works.  He was confronted by another attendee who said "that's true but there's a chance the owner could die tomorrow, so what do you do then?  "It's up to us to defend our choice, whatever we conclude," Yeanoplos concluded, trying to move beyond this complicated "speed bump" for the appraisal profession.

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