Preview: Business Valuation Update Yearbook 2024
The year 2023 was defined by unexpected economic events, new valuation conferences, and more. To kick off a new year, BVR has just released the Business Valuation Update Yearbook, 2024 edition, with 404 pages of the biggest events in valuation from the last year. Enjoy this preview taken from the chapter "How to Use the Latest DLOM Study for the Johnson/Park Empirical Method."
Over a quarter (27%) of valuation practitioners surveyed say they use the Johnson/Park empirical method for determining discounts for lack of marketability (DLOM) in the valuation of interests in privately held entities.1 The recently released “2022 Discount for Lack of Marketability (DLOM) Study” provides current DLOM rates of return to use when implementing the method.2
In a nutshell. The method is based on the fundamental financial concept of risk and reward, i.e., when risk increases, an investor will demand a higher return. But just how much higher? The Johnson/Park empirical method provides a basis to determine how much of an increase in the rate of return is required to compensate investors for the lack of marketability of a subject interest. The method involves making an analytical adjustment (applying a DLOM) to increase the rate of return
of the investment to compensate for the additional risks an investor is exposed to when holding a nonmarketable interest. The application of the DLOM results in an increase in the effective rate of return of the investment.
Three research studies are used (published annually): “Private Equity vs. Public Equity Returns,” “Restricted Stock Transactions,” and “LT vs. ST Bond Horizon Risk.” This methodology was introduced in 1995 and has been used in several tax court cases including the first family limited partnership (FLP) case to go to trial.
2022 rates. The three annual studies the 2022 report examines show that investors continue to demand 30% to 45% higher rates of return for the additional risk of holding a nonmarketable investment or being exposed to increased risk over the holding period. Comparing the 2022 findings with the research that has been conducted since 2006 indicates a similar range of results for the average increase in the required rate of return (see Exhibit 1).
Make sure that you are up to date on all the most important valuation events from 2023 with this must-read book. Learn more about this essential read here; while you’re at it, make sure that you’re up to date on all the most impactful valuation law cases of 2023 by checking out the Business Valuation Update Yearbook, 2024 edition.
1. “BVR Survey on Methods Used for Estimating a Discount for Lack of Marketability (DLOM)”—July 2021; free download available at: bvresources.com/downloads.
2. Available at bvresources.com/products/2022-discount-for-lack-of-marketability-study.