Valuation Advisors Lack of Marketability Discount Study Frequently Asked Questions (FAQs)
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Q:What is the legend for Valuation Advisors Lack of Marketability Discount Study data?
||PreIPOTransactionTimeframe||IPO date - Transaction date|
||TransactionDate||The date a sale or issuance of stock or options occurred.|
|Transaction Price Per Share
||TransactionPrice||The price of the stock or option.|
||CPSSO||CPS = convertible preferred stock, S = common stock, and O = stock option.|
||IPODate||The date shares of the company were sold to the public for the first time.|
|IPO Price Per Share
||IPOPrice||The price of the stock paid by the initial public investors to acquire their shares.|
||Revenues||Total sales for the year as shown on the income statement closest to the IPO date.|
||MarketabilityDiscount||The difference between the IPO price per share and the price on a given transaction date.|
||Assets||The total assets on the balance sheet at the date nearest the IPO date.|
|Operating Income (Loss)
||OperatingIncome||The income of the Company on the income statement nearest the IPO date, but before interest or other extraordinary items.|
|Operating Profit Margin
||OperatingProfitMargin||Operating Income (Loss) divided by Net Sales.|
||Profitability||Whether the company has positive operating income.|
Q: I see you’ve just added a lot of transactions with a pre-IPO transaction timeframe greater than two years. I’ve got some general questions about the new data – can you please answer them?
A: Please follow this link for answers to questions about the new data
Q: How should I search the database? When I conduct a search I find there’s not enough content in my industry of interest – what do I do?
A: Below are edited excerpts from Brian Pearson’s (the author of the Valuation Advisors Lack of Marketability Discount Study) August 23rd, 2007, webinar on the use of the Valuation Advisors DLOM Study:
In some cases, the size of the business or its operating results may be more important than the industry in which the business operates.
For lack of marketability and your target company – the common thread or the common theme, of course, is the riskier the company, arguably oftentimes over the timeframe, the higher that lack of marketability discount is going to be. And so as you look at your target company, you can look at its profitability especially and search in our database for companies of similar profitability, similar size (revenues or assets), similar industry, and figure out which of those factors, if not all of them, are important, and obviously the search results themselves if it's in a particular industry that has enough transactions. Or if it isn't in an industry with a lot of transactions, what you want to do then is go more global. So if you're in a very niche industry – in our database which has over 3,500 transactions – that still doesn't have something in there that targets it, then what you want to do is expand the search. So you start probably narrow, start with your SIC code. If that doesn't work, then you start to expand it by using assets, revenues, operating income, and use that to target the search closer to your company.
If you have somewhat of a unique industry and you're trying to find a comparable group, once again, you might search it by operating income, and that might give you a sense of companies that have gone public that had operating incomes similar to your target company. And oftentimes, that's helpful especially if you have high operating income margins. Low operating income margins aren't too difficult usually. Higher ones tend to be, so you can start with the industry and operating margins, but you might just globally search the whole database for operating margins because if you don't find companies that fit the industry, you might have luck with just trying to make the argument that a company with similar operating margins might be viewed as a similar risk by investors. So that would be another functional use for the database
Q: How do I pass along to my clients the expenses I incur for guideline company data, control premium data, discount for lack of marketability data, economic data, industry data, etc?
A: Some of our subscribers impose a separate resource/technology charge for every valuation assignment. They know approximately how many appraisals they do per year and divide that number into the [annual] costs of the databases and basic data resources they use, thereby passing along the resource (or technology) charges.
Q: Where is the source of the information contained in the database?
A: Before a company has an initial public offering (i.e. IPO, or they "go public"), they file a prospectus with the SEC. These prospectuses are available through the SEC's EDGAR database, and also from the investment bankers underwriting the offering. VAL receives a copy of each prospectus and reviews it. We then record any transactions involving the company's stock, stock options or convertible preferred stock prior to going public (i.e. when it was still a private company).
Q: How is the transaction price per share determined?
A: All the transaction prices originate from the company’s final registration statement. The most recent stock or option price prior to the IPO may be the transaction price used, depending on whether it represents true Fair Market Value per SEC guidelines. For example, in the case of Blue Nile, transaction was an option that was issued at a price below fair market value, so it adjusted for the deferred compensation the company had to record to make the pre-IPO transaction price used in our database reflect the SEC’s view of true fair market value. Thus, the database figures account for so called “cheap” stock or options. Thus, a transaction price in the prospectus may be different from what’s reported in the database to account for the compensation component of any “underpricing” of the stock or option, as reported in the prospectus. If no such adjustment needs to be made, the actual option or stock price is then used.
Q: Are all IPOs included in the Valuation Advisors study?
A: No. The following IPOs are excluded: IPOs related to REITs, IPOs without transactions in their stock, convertible preferred stock or options prior to the IPO, Master Limited Partnerships (MLP), Limited Partnerships (LP), closed end funds, and mutual conversions.
Q: How does Valuation Advisors adjust for stock splits prior to the IPO?
A: All the data is typically adjusted by the investment banking firms for any stock splits. They will usually disclose this in the capitalization section of the prospectus.
Q: Have you analyzed the relationship between US DLOMs and International DLOMs and if so, what have you found?
A: We haven’t statistically analyzed the relationship, but the general trend is similar to the “US only discounts” in that the International only discounts tend to increase over time from the IPO date.
Q: Are these international companies filing with the SEC more appropriate to use for international valuations, only or more appropriate for US valuations—or both?
A: The International companies are potentially appropriate for both. If you are trying to calculate discounts by industry or for a particular time period only, you may want to use all the companies (foreign and domestic) in the database. The Valuation Advisors Lack of Marketability Discount Study is the largest valuation discount database in the world. If you are trying to calculate discounts for an international company, you would most likely want to start with the international only transactions, which can be aggregated, or searched by country (plus all the existing search parameters for US companies). The international component of the database is very useful to any valuation firm doing work for an international company or a company that has a considerable portion of its sales, earnings or operations outside the United States.
Q: Does "Country" refer to the country of incorporation or the country of listing?
A: This is the country of incorporation, with a few exceptions. Valuation Advisors looks to see where the company does business and where it maintains its corporate offices. An exception would be insurance companies. Oftentimes insurance companies are incorporated in a foreign country and trade in the US, and have corporate offices in New York. They would be considered a domestic company. Whereas, a company that is incorporated in Hong Kong, has corporate offices in China, and is listing on the NYSE, would be considered a foreign corporation.
Q: Does the study get updated as new companies "go public"?
A: We get prospectuses for new IPO's usually in the week after they go public. It takes some time to review the information, and compile it for the database, but the database is updated for new IPO's at least once per month.
Q: What is the timeframe of the study?
A: The study tracks transactions in pre-IPO companies within 16 years of their IPO.
Q: Why is the database useful to me?
A: Because it will provide an objective basis for making your valuation reports' discounts for lack of marketability more defensible to third parties. Specifically, it gives you a documented resource for your work paper files.
Q: How does this information help me in my valuation?
A: By allowing you to search by industry the database allows you to see what actual discounts for lack of marketability were for companies in an industry similar to the company you are valuing. You can also search by revenues, operating income, and assets to find companies that are similar in size to the company you're valuing. These search options allow you to support the lack of marketability discount you use in a valuation report by showing discounts from comparable companies, thus making your entire valuation report more defensible.
Q: Will the database help me find comparable or guideline companies using a market valuation approach?
A: Yes, the VAL Study is a good resource for finding similar public companies (either by size or industry) to the company you are valuing. This can give you a good sample of public companies by industry to review for your market approach.
Q: How can I search the information?
A: Our database is fully searchable by revenues, operating income, assets, date of the IPO (or time period), and industry. You can also combine these various parameters.
Q: Can I perform a search by year?
A: The database is searchable by years going back to 1985. Results will depend on the number of transactions in a given year.
Q: Can I search by both SIC and NAICS codes? What is the difference?
A: Yes, the VAL study contains both SIC and NAICS codes for the companies contained in it. The SIC (Standard Industry Classification) system was last updated in 1987. The Standard Industrial Classification (SIC) system is a series of number codes that attempts to classify all business establishments by the types of products or services they make available. Establishments engaged in the same activity, whatever their size or type of ownership, are assigned the same SIC code. These definitions are important for standardization.
The SIC is being replaced (by the Census Bureau for their surveys) by the North American Industry Classification System (NAICS) system. This six digit code is a major revision that not only provides for newer industries, but also reorganizes the categories on a production/process-oriented basis (SIC used a mixture of production-based and market-based categories).
The NAICS hierarchical structure is:
XX Industry Sector (anticipating up to 20 industries)
XXX Industry Subsector
XXXX Industry Group
VAL has found that using the 3 digit NAICS group provides the best results when searching our database
Q: There are columns labeled NAICS code, and 3 digit NAICS. What is the difference?
A: The North American Industry Classification System (NAICS) uses up to a 6 digit number to reference a specific industry (e.g. 334119, Other Computer Peripheral Manufacturing). A 3 digit number (e.g. 334, Computer and Electronic Product Manufacturing) refers to a less specific industry group. In other words, NAICS 334119 would be contained in NAICS 334, along with other electronic product manufacturers. A search by the 3 digit NAICS may be more likely to provide companies that aren't in the exact industry you're looking for, but are similar.
Q: What if my practice is litigation based?
A: The study is especially useful because it provides market based data. Nonetheless, results must be applied properly based on the particular facts in the case.
Q: Can you search the database by different SIC and NAICS Codes?
Q: Does the database include all transactions (stock, option, cps) within 16 years of the IPO date, or is there a filter Valuation Advisors applies to the data to eliminate some transactions?
A: The database does not include all transactions within 16 years of the IPO date. Here are a few examples. First, where there were multiple transactions in one of the 3 month time periods, or beyond one year, the databse uses the highest priced transaction (i.e. the lowest discount transaction) to be conservative in the discount numbers. For example, if the IPO price was $15, and two transactions occurred within 3 months of the IPO at $11 and $13, the database would only use the transaction at $13. Second, the database would include transactions within the same time period if they were CPS, but not options and stock. Thus, if you had all three transactions in the same time period, the database would include the CPS transaction and the higher of the option or stock transaction. Third, the database will never include transactions that are for companies that are partnerships, REITs etc.
Q: How does Valuation Advisors define the IPO price -- is it the price set by the investment bank prior to trading, or is it the actual trading price, and if so, which trading price, end of first day, first trade, X-day moving average of trading price, etc?
A: The IPO price in the study is the price the investor pays at the public offering (also, what gets printed on the prospectus). In other words, it's the final price set by the investment banker. Take JetBlue for example, which went public in April 2002. Its IPO price was $27, and it opened trading in the high $30's and finished the first day of trading at $45. The price we use is the $27, since that's the price you pay to buy your shares as the investor, regardless of how the stock later trades, up or down.
Q: Do the companies included in the Valuation Advisors Lack of Marketability Discount Study make regular distributions?
A: Most of the companies in the Valuation Advisors Lack of Marketability Discount Study are C corporations, and therefore do not make distributions, or for that matter, pay dividends. Some companies were S Corporations that converted to C corporations, but only a few. The presumption is that they made standard S Corporation related distributions yearly, or possibly a one-time distribution to take out any built up AAA account balances prior to conversion.
Q: Does the Valuation Advisors Lack of Marketability Discount Study allow for earnings growth between the time of the "transaction" and the IPO?
A: Valuation Advisors does not account or adjust the data for such possible growth. Since a valuation is at a point in time, and it ideally captures such future growth in the valuation result, to somehow arbitrarily adjust the values determined would be to then skew the discounts determined. We are letting the market dictate such results.
One method you could use for a rapidly growing company would be to select the IPO industry and compare post IPO growth from the companies found in the database to the subject company and use those with similar post IPO growth rates as a benchmark for selection of your discounts
Q: The Valuation Advisors Lack of Marketability Discount Study classifies data under the title "Pre-IPO timeframe" -- 1-90 days; 91-180 days; etc. What does this mean? How do you know the time frame before a company issues an IPO?
A: The database field in the Valuation Advisors Lack of Marketability Discount Study™ is titled Pre-IPO timeframe or Pre-IPO transaction timeframe. The field is calculated as follows:
IPO date - Transaction date = Pre-IPO timeframe.
The transaction date is the date on which the stock, option or convertible preferred stock transaction occurred prior to the IPO date.
Q: Based on the above Q&A, are you saying in order to qualify for this study, the stock transaction, for example, occurred non-publicly before the IPO? Or, continuing with the stock transaction example, was the price of the stock valued at a time prior to the IPO, and then when the IPO was issued, the stock value was discounted by X percent?
A: The transaction date is the date when the transaction occurred. Typically, this is the issuance of stock options or the sale of common or preferred stock. Since these companies are still private at the time, the issue (stock or option) is not traded (since no market exists). The Valuation Advisors Lack of Marketability Discount Study then calculates the discount based on the difference between the price on a transaction date and the IPO price. The timeframe in which it occurs is based on the difference between the date of the transaction and the IPO date.
We aren't determining the value. The transaction price sets the "value." The Valuation Advisors Lack of Marketability Discount Study then tracks the discounts between the transaction price and the IPO price.
Q: How are the marketability discounts calculated for the CPS (convertible preferred stock) and O (options) transaction types? Is the option or convertible transacted and then compared with the price of the option or the convertible at the point of the IPO? How can the study be applied to a steel foundry for example?
A: The discounts are the difference between the IPO Price and the time the option or CPS was issued. In the case of CPS, it’s the effective stock price at issuance, using the convertible feature (if this is provided in shares, typically the conversion can only occur upon a sale of IPO, so usually it’s the IPO price).Regarding your steel foundry, one might choose to focus on using certain asset ranges for the discount. Also, one might narrow this by calculating assets to revenues for the foundry and specifying a similar level of revenues (based on the foundry’s assets) in your search. This approach would be more “company specific” than “time frame to IPO” specific. Using level of profits is always helpful, but once again, one should cross search with assets.
Q: Does the Valuation Advisors Lack of Marketability Discount Study exclude or include insider pre-IPO transactions?
A: It includes insider transactions. When they are "below market" resulting in compensation expense under FAS 123, we also account for this in the transaction.
Q: Does the database indicate when the pre-IPO price includes insiders? And can we eliminate this from the comparison between the Pre-IPO price and the IPO price to arrive at differences for just transactions between unrelated third-parties? If we are using the database to estimate DLOM what does the following have to do with the DLOM calculation? "When they are "below market" resulting in compensation expense under FAS 123, we also account for this in the transaction." (see above question and answer) This infers to me that you are referring to options "granted out-of-the money" to insiders (or in most cases) prior to the IPO and comparing that price to the IPO price, which would seem to me to represent compensation not DLOM. Or are you comparing the strike price (i.e. which should be the FMV or tested as FMV by law) to the Pre-IPO price?
A: The database doesn't disclose when it's an insider transaction, since the prospectus filing doesn't disclose this information. Regarding FAS 123, we adjust the "below market" transactions (many of which could be insiders) to market prices, and then calculate the DLOM. The market price may or may not be close to the strike price. In other words, the DLOM we are calculating is based on an SEC reviewed figure for FMV, irrespective of the stated strike price. The difference between the FAS 123 adjusted number and the offering price is the DLOM.
Q: How does the Valuation Advisors Lack of Marketability Discount Study report revenue and operating income for bank-related data? What period do you use for the income data? For the asset data, what date do you use?
A: For the revenue field for a bank, the database uses the “Interest Income” line from the bank’s financial statements. In most cases, the database uses the most recently completed fiscal year per the company’s IPO prospectus filing.
For operating income, the database considers the company’s pre-tax income from the same period the interest income was from. Since there’s not a clean “operating income” figure for a bank, pre-tax income seems to be the closest approximation.
For assets, the database uses the total assets figure for the latest period reported in the company’s IPO prospectus. Since companies don’t always go public at the start of their fiscal year, this data might not be in the same time period as the income statement data the database reports.
Q: Why does my search for transactions in a given time period show results different from what was previously published?
A: From time to time we identify transactions from earlier periods that were not included in previously published information. When we find those transactions, they are added to the database, and may have a slight impact on the average results from those periods, as well as the total number of transactions in those periods.
Q: Why don't I see my SIC code of interest in the search engine's list of SIC codes?
A: The website's search engines use the underlying data to create the list of SIC codes. If your SIC code is not listed in the search engine, this means there are no transactions with that SIC code in the selected database. You may want to search the other databases to see if they have any helpful data. You can search all databases at the same time by SIC code by selecting the "Search All" menu option. The results of this search engine will display the number of transactions contained in each deal and market data database. If you click on each databases' representative number, the wevsite will display a summary of the data in that database. If you are a subscriber to the selected database, the website will display the subscriber search results. If you are not a subscriber to the selected database, the website will display the visitor search results.
Q: How can I expand my 4-digit SIC search to a 3-digit search or 2-digit search (select more than one SIC code)?
A: By pressing and holding down the LEFT mouse button, you can highlight a series of SIC codes (either by two digit SIC codes, three digit SIC codes or any series you want [all of manufacturing, for example]).
By holding down the CONTROL button on the keyboard (and clicking with the LEFT mouse button), you can highlight a noncontiguous group of SIC codes.
Q: >It appears that a business’s “selling price” in each deal and market data database uses different terminology; can you please clarify the “selling price” in each database?/p>
A: Below, we show the term used for the “selling price” in each deal and market data database and its respective definition:
- Public Stats uses the term MVIC (Market Value of Invested Capital) for the “selling price.” The MVIC is the overall consideration in the business sale and includes any cash, notes and/or securities that were used as a form of payment plus any interest-bearing liabilities assumed by the buyer.
- BIZCOMPS uses one term for the “selling price”; Sale Price. Sale Price is the actual sale price ($000's) where inventory has been deducted, if it was included in the sale price.
- Pratt’s Stats uses the term MVIC (Market Value of Invested Capital) for the “selling price.” The MVIC is the overall consideration in the business sale and includes any cash, notes and/or securities that were used as a form of payment plus any interest-bearing liabilities assumed by the buyer.
- The Mergerstat/BVR Control Premium Study also uses two terms for the “selling price”; the Target Invested Capital (TIC) and Price. The TIC is the target company's implied total invested capital based on the sum of the implied market value of equity plus the face value of total interest bearing debt and the book value of preferred stock outstanding prior to the announcement date. The price is the implied market value of equity.
- The FMV Restricted Stock Study does not report details on the sale of either a portion of a company or an entire company and therefore does not contain a selling price field. Instead, this database reports the details related to transactions in restricted stock. This database does report a Market Value (in $000s) which is the market value of the firm determined on a pre-deal basis. The market value is calculated by multiplying the shares outstanding before the private placement with the high-low average market price for the stock for the month prior to the transaction. The market value is not the selling price, per se, but a calculation of the value of the total equity on the date of the restricted stock transaction.
- The Valuation Advisors’ Lack of Marketability Discount Study does not report details on the sale of either a portion of a company or an entire company and therefore does not contain a selling price field. Instead, this database reports the details related to transactions in common stocks, stock options or convertible preferred stocks prior to an initial public offering, and the relationship of these prices to the IPO price per share (the price of the stock paid by the initial public investors to acquire their shares).
Q: Each time after I alter my search of the database and I ask for a printable format, the results of my very first search continues to show in the printable format window. Is there something different that I can do so that I can print the results of the most current search?
A: If you are using Microsoft Internet Explorer, please do the following:
- In Internet Explorer, go to the Tools/Internet Options menu
- On the General tab, in the Temporary Internet Files section, click "Delete Files"
- On the General tab, in the Temporary Internet Files section, click "Settings"
- If it is not already clicked, click the "Every visit to the page" radio button, then click "OK"
Q: I am unable to get the printable format window to appear when clicking on “Printable Format” or the Excel download when clicking "Excel Format."
A: Check your browser version and update to the latest. Also, check if you have some sort of pop-up window blocker, you need to disable the pop-up window blocker.
Some of the more advanced pop-up window blockers will allow you to customize the specific pop-ups you would like to allow. Otherwise they will need to disable the program in order to view the printable format.
Some pop-up blockers can be temporarily disabled by holding the "Ctrl" or "Alt" keys on the keyboard when you are attempting to allow pop-ups.
Q: Why don’t I see Excel Export as an option when I use Mozilla Firefox?
A: Currently the Excel Export feature used VBScript which is only supported in Internet Explorer. We are in the process of updating the export function to be compatible with other web browsers. An alternative would be to use the "Email to Me" option which will email the data to you in a comma separated file.
Q: When I click on the Excel Format button I am asked “Do you have Microsoft Excel installed?” I answer yes and then nothing happens. What is the fix for this?
A: This typically happens when the subscriber is using a pop-up blocker. To bypass the pop-up blocker, press down on either your “Shift,” “Control,” or "Alt" key (try both) prior AND during clicking on the Excel Format button – this should bypass the pop-up blocker. If you are able, you may also add bvresources.com as a “trusted” site in your pop-up blocker program – this would negate the need to hold down your Control button when you next use the Excel Format button.
Q: We are Windows users and are not successful in downloading the data to Excel format.
A: If you are using Outlook to browse the internet, you may experience this problem. Apparently web browsing within Outlook has problems passing data from one page to another. To solve this, exit Outlook and use Internet Explorer to access our website.
Another possibility is that you may have a pop-up blocker that is preventing the new window from appearing. To solve this, disable your pop-up blocker by (1) turning the pop-up blocker off until you are done exporting the data (2) holding either shift or control (dependant on your pop-up blocking software) which allows you to temporarily allow pop-ups while the button is pressed, and then reverts to blocking pop-ups once the button is depressed or (3) find the options or settings on your pop-up blocker and choose to allow pop-ups from our website.
Q: We are Mac users and are not successful in downloading the data into Excel format.
A: Make sure your are using the most recent version of Internet Explorer for Mac. Here's a link to download the most recent version of IE for Mac.
If you are running Office 2001 for Mac, make sure you have the latest version. Click the link below to download it and install it.
http://www.microsoft.com/mac/downloads.aspx#office2001 and click on Microsoft Office 2001Combined Update 9.0.4
If you have any further questions please contact Nathan Struk at: email@example.com or phone at 1-503-291-7963.
Q: Can I print more than one transaction at a time?
A: To print a group of transactions (the current group size is 10); on the search results page in the list of transactions, utilize the icon that looks like a red piece of paper – it is labeled “Print Detail Report Package”. When printing more than a couple of detailed transaction reports, this will save you time.
Q: I want the transaction reports to fit onto one page, instead of two. What can I do to make this possible?
A: The best solution is to maximize your print margins. In Internet Explorer the default margin size is 0.75 inches. When you print transaction reports, reduce the print margins to 0.25 inches and most will fit on a single page. Also, you should remove any header/footer information that Internet Explorer includes in web page printouts. The print margins and header/footer settings can be found under File -> Page Setup in Internet Explorer.
Q: Can you please discuss the difference between the mean and the median and how I may interpret the mean and median values of the search results?
A: Click here to download a PDF with a comprehensive explanation.
Q: I am having trouble viewing the Excel Exported data in Excel 2000. Can you please help with this?
A: If you are having trouble viewing the Excel exported dat and are using Excel 2000 (other versions of Excel have not exhibited this problem), please read the following.
In the original version of Office 2000 there was a bug when passing Excel data over the web. This problem was fixed in a service pack released by Microsoft. Once you install this service pack update on your computer you should not have any trouble viewing the Excel data.
To update your Office 2000 to the latest service pack release, please locate your Office 2000 CD or Excel 2000 CD and then visit the following web site at Microsoft.com:
At the top of the page click on the following link:
Check for Updates
You will then be taken through a process of updating your Office 2000 install on your computer. This will update your Excel application as well. During the install, it will ask for your Office 2000 CD.
If you have any questions please e-mail Nathan Struk at: firstname.lastname@example.org