This is a guest editorial from Rick Warner. Rick's now a regular contributor to BVR...
I’ve just finished spending several hours participating in a lively online discussion about discounts for lack of marketability and controlling interests. It was a good discussion with many opinions both “pro” and “con” being put forth.
But how many of you have heard of the DLOU – discount for lack of understandability? It’s an adjustment that is particularly applicable to appraisers and their work, but apparently not many of us have heard of it (or at least paid any attention to it).
The DLOU is one of the discounts most often applied by judges as they read appraisers’ opinions. And you can see how this might happen. The worthy judge is presented with two well reasoned opinions, prepared by otherwise qualified individuals. The judge now knows what his clerks will be reading for the next day or so.
The capable clerks dutifully accept their assignment to read, review, and summarize the opinions of value prepared by the learned appraisers. And here’s what happens next.
What the Appraiser Wrote
“We relied upon the total revenues of the company issuing the restricted stock as a proxy for "size"; we then sorted the 597 transactions into quintiles and for each quintile determined the median "size" and median discount as of the transaction month as reported by FMV Opinions, Inc. This analysis demonstrated that as the revenues of companies issuing restricted stock increases, the size of the discount associated with the restricted stock decreases.”
What the Appraiser Meant
“Larger companies have smaller discounts than smaller companies.”
What the Clerk Read
“Die großer Gesellschaften haben kleiner Diskonten als kleiner Gesellschaften.”
Besides the fact that my German skills are “challenged” to say the least, the point is that the law clerk might just as well be reading a foreign language as reading what the appraiser wrote. A discount for lack of understanding is called for and applied by the clerk; i.e., whatever you so skillfully wrote in your opinion has been discounted by the reader because he or she could not understand what you wrote.
Lessons for Appraisers
I’m ashamed to admit that the example of “what the appraiser wrote” was from one of my own reports. The work we do is challenging, and most of us like the analytical work. Fewer of us like to write about the work that we did in completing an appraisal. But unless we can communicate effectively in writing, we can unwittingly subject ourselves to a DLOU – discount for lack of understandability. And like any other adjustment to value, a DLOU can be the key to winning or losing a case.
Principal, Great Lakes Valuations