Stout DLOM Calculator™ Frequently Asked Questions (FAQs)
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- Download PDF version of the Stout Restricted Stock Study Companion Guide
- View the FAQs for the Stout Restricted Stock Study
Q: Do I need to subscribe to the calculator or can I use it on a single use basis?
A: The calculator is free with a subscription to the Stout Restricted Stock Study, but you can also purchase the calculator on a single use basis if you are not a subscriber.
Q: How do you apply the calculator when valuing minority interests?
A: The calculator is specifically designed to determine DLOMs for minority interests in private companies. The methodology underlying the calculator is based on the empirically observed difference between fully liquid, minority interests in public companies and illiquid, minority interests in the same companies.
Q: Can the calculator be used to determine DLOMs for real estate holding companies?
A: The calculator is most applicable to operating companies, but may also be applied to real estate holding companies as well as entities holding marketable securities and other assets. Users should take care that their inputs reflect the level of risk associated with the entity being valued. For real estate holding companies this would typically mean lower volatility and market-to-book ratios, high profit margins, etc. As long as the risk metrics reflect the subject company-specific risk, the methodology and DLOM indications provided by the calculator may be appropriate.
Q: Can you exclude companies in certain industries from the analysis?
A: The calculator does not provide an option to exclude any issuers in the study. However, the calculator does have an option to “Trim Dates”. Selecting “Yes” to “Trim Dates” will trim the transactions that are used by the calculator that occur after your subject company’s valuation date.
Further, as described in the Stout Restricted Stock Study Companion Guide, the authors recommend looking to the financial characteristics of the subject company rather than to its industry group when determining an appropriate DLOM. If a user wanted to conduct their analysis with only certain industries, they are able to search the study database instead of using the calculator.
Q: Can users view the underlying transactions that support the calculator output?
A: Yes, the guide, available here, explains how the calculations in the calculator are made, and how the analysis is conducted.
Q: Is there output supporting the calculation so users can avoid “black box” issues?
A: The calculator uses the transactions that are available in the study . A user can search the study to view the transactions that support the calculator. Note: Those who purchase a single use of the calculator will need to subscribe in order to search and view all the transactions in the study.
Q: Has the raw data in the study been adjusted for inflation?
A: While the calculator provides users with the option of using inflation-adjusted data, the raw data in the study is delivered to subscribers on an unadjusted basis. However, you can download an Inflation Adjustment MS Excel Tool which allows users to adjust the data for inlation as of a specific valuation date.
Q: Do the authors recommend that valuation analysts use the calculator rather than developing their own methodology using Stout's data?
A: The calculator is provided as a useful tool for valuation experts who do not wish to expend the time necessary to recreate the author's methodology or to develop their own. Subscribers to the study may use the raw data as they desire. Although the calculator provides accurate DLOMs based on the factors deemed to be relevant in the study, it is still recommended that the user obtain a formal valuation to account for other factors and circumstances unique to the underlying company.
Q: How can an analyst know what the subject company's market value is?
A: The market value input in the calculator represents the marketable minority interest value conclusion - i.e., the value of 100% of the company’s equity prior to application of the DLOM.
Q: Has the calculator been tax court tested and approved?
A: The calculator has has not been commented on by the IRS or been the subject of any court case. However, the data and methodology underlying the calculator are based on the authors own DLOM determination methods, which are consistent with a string of tax court cases (Mandelbaum, Temple) that plead for a detailed comparative analysis of the subject company with the companies that comprise restricted stock studies. As suggested in the Temple case, the calculator “incorporates the market dynamics of restricted stock sales” [Temple v. U.S. – No. 9:03-CV-165 (March 10, 2006)] into the DLOM determination process.
Q: Does the data used in the calculator exclude transactions with premiums rather than discounts?
A: To avoid potential criticisms regarding bias, the calculator includes all transactions in the study, including transactions with premiums. With that being said, the calculator does provide the user with the option to eliminate transaction premiums in their calculations. To do so, select “No Premiums” in the dropdown for “Transaction Premiums” on the initial DLOM calculator criteria page.
As a note, the data in the calculator and study are heavily vetted and screened, eliminating over 95% of all private placements of restricted stock for various reasons that would make the transactions an inappropriate benchmark for fair market value (such as not being arm’s length, issued in connection with a merger or acquisition, issued in exchange for services, non-vanilla transactions, transactions with warrants or other contractual arrangements that might affect the buyers’ upside or downside in the deal, stock that was registered or became registered and marketable within 30 days of the transaction, among other criteria).
Q: In the best comparables analysis, what is the difference between the number of quintile matches and the transaction count?
A: The number of quintile matches refers to the number of variables (i.e., financial characteristics) that a given issuer in the study is a quintile match with the subject company. The transaction count represents the number of issuers that have “x” quintile matches.
Q: Is leverage considered in the characteristics?
A: Stout's analysis of the study data suggests that leverage is not a primary determinant of the marketability discount. However, leverage will impact the analysis by reducing shareholders’ equity and increasing volatility (to the extent volatility is used in the analysis).
Q: Is there a discussion of the data and methodology underlying the calculator that may be inserted into valuation reports?
A: The guide provides a detailed discussion for valuation experts to refer to when preparing valuation reports.
Q: How reliable is this methodology for supporting a DLOM for a business with an equity value less than $1 million?
A: The study includes transactions involving very small public companies and those with low and even negative shareholders’ equity. The data and methodology, when applied correctly, are generally appropriate for valuing most privately held companies.
Q: How large of DLOMs are generally supportable and accepted? Should the DLOM be capped at a certain level?
A: Stout has developed the calculator in an effort to provide valuation experts with a practical tool that applies empirical data and a sound methodology to derive DLOMs. When applied appropriately, the calculator generally yields appropriate discount indications that are empirically supported. Arbitrarily setting parameters for appropriate DLOMs based on what the IRS or the courts have accepted in prior instances is not recommended by Stout, and has been frowned on by the courts.
Q: How does the size of the subject interest being valued impact the calculator?
A: The calculator provides discount indications for (i) securities that are approximately as illiquid as typical restricted stock (i.e., the restricted stock equivalent discount), and (ii) securities that are extremely illiquid, such as private equity. Generally, the percentage interest of a minority stake in a private firm should not significantly impact the degree of liquidity of the interest (i.e., minority interests of any percentage ownership have a similar degree of illiquidity due to not having access to public markets). However, if a given interest enjoys certain rights not typically associated with a true minority interest, the marketability of such interest may be improved and a subjective adjustment to the private equity discount indicated by the calculator may be warranted.
Q: When using the calculator, can I use normalized net income of my subject company or do I need to use the latest 12 months of data?
A: While we have not made adjustments to the restricted stock issuers’ net income, we expect that on average over a large enough data set the latest twelve month figures for the restricted stock issuers are representative of the companies’ recurring performance. So, it may be appropriate to use a normalized net income figure for a subject company when performing a comparative analysis with the companies in the study.
Q: Describe the impact of different holding periods on the discount provided by the calculator.
A: All things being equal, two-year holding period restricted stock data is more similar, in terms of illiquidity, to private equity than is one-year, six-month or six-month with registration rights restricted stock data. Accordingly, Stout has added functionality to the calculator which allows users to select a “two-year holding period equivalent discounts” which adjusts each one-year holding period, six-month holding period, and registration rights transaction.
Q: Why does the data need to be adjusted to a two-year equivalent? When is it appropriate to use two year equivalent adjusted data?
A: Recent restricted stock transactions have shorter required holding periods under Rule 144. Stout's two-year equivalent discount makes current data (six-month holding period and six-month holding period with registration rights) more meaningful in the determination of the appropriate DLOM. All things being equal, two-year holding period transactions are the most similar to private company equity and, thus, most appropriate for comparison in determining discounts for lack of marketability. Stout’s two-year equivalent adjustment may be used when determining a DLOM for private company equity. For a security with a materially greater or lesser degree of liquidity than the two-year equivalent restricted stock data, appraisers will still need to make subjective adjustments to the discount indications.
Q: Are factors such as magnitude and variability of profit margins and variability of revenue important factors for the DLOM?
A: Stout has analyzed the impact of dozens of company financial characteristics on the DLOM, and has developed the calculator based on the characteristics the authors believe to be the best predictors of the DLOM. However, other factors may be important as well. To the extent appraisers are able to demonstrate correlations between DLOMs and characteristics not currently included in the calculator, we will gladly accept their input and will continue to improve the calculator to include such items, as we deem appropriate.
Q: When at the private equity discount (PED) step in the calculator, should I use the multiplicative adjustment factors or the inverse multiplicative adjustment factors?
A: The inverse multiplicative factors should generally be considered when the Restricted Stock Equivalent Discount (RSED) indication for a subject company is high, but should not be given weight for lower RSEDs (doing so will artificially inflate the PED). For more information, see the companion guide.
Q: Why are the private equity discount (PED) adjustment factors different when the data is adjusted to two year equivalent?
A: The calculation for the PED adjustment factors, as described in the companion guide, rely on the calculator to determine RSED for comparison with large block (greater than 30%) transactions. Accordingly, the PED adjustment factors for use with two-year equivalent adjusted data were determined using the calculator with two-year holding period equivalent discounts. The PED adjustment factors for unadjusted data were determined based on the unadjusted calculator.