Whether in the form of the holding of publicly traded securities or other asset classes (art, real estate, personal property), significant blocks of these assets may upset the balance in their respective markets, leading to an inability to transact all in a day or reasonable time period. Blockage discounts are discussed primarily for stock holdings, whereas an absorption discount is typically applied to real estate, art, and personal property. Join experts Ed Pratesi and Dan ...
Are you up to speed on the new developments in the forward-starting put option model? Dispel confusion and common misconceptions as Stillian Ghaidarov walks you through a methodology for the application of put option models. Compare with other put option models commonly used to quantify illiquidity discounts. Join this session to strengthen your conceptual understanding of the theoretical framework behind these models and gain deeper insights about their relative strengths and weaknesses. Learn how to ...
Minority interest holders have been looking for easier ways to sell interests for decades. Beginning with the real estate secondary limited partnership market in the 1980s, several initiatives have been undertaken to create opportunities for both sellers and buyers. Join Christine Baker and Charlie Sheridan for a discussion on alternatives available today for a minority investor and consider whether today’s market might impact appraisers’ and valuators’ traditional views of nonmarketable, minority interests. Get a front ...
April 2017 978-1-119-28660-8 Hardcover (1,296 pages)
John Wiley & Sons, Inc.
Professor Aswath Damodaran (New York University Stern School of Business) has released new data posts and data sets updated for 2017 related to valuation and the cost of capital, including historical stock returns, implied equity risk premiums, country risk premiums, and more.
February 2017 PDF (250 pages)
Business Valuation Resources, LLC
February 2017 PDF (349 pages)
Business Valuation Resources, LLC
The Delaware Court of Chancery recently cut short a challenge to a going-private merger when it dismissed the plaintiffs' complaint. The plaintiffs unsuccessfully argued the defendants breached their fiduciary duties when they favored the controller's lower bid over a third-party bidder's higher offer.
A general option-based approach to estimating the discount for lack of marketability is offered. It is general enough to capture maturity, volatility, hedging availability, and investor skill, as well as other important factors. The model is shown to contain several option-based models as special cases. The model also contains two weighting variables that provide valuation professionals much needed flexibility in addressing the unique challenges of each nonmarketable valuation assignment. Selected prior empirical results are reinterpreted ...
Is there a consensus yet on the method to use for estimating a discount for lack of marketability (DLOM)? Find out by taking a short survey.
Our thanks to those who have responded so far to our survey designed to narrow down the methods most frequently used for determining a discount for lack of marketability (DLOM).
It’s easy to lose count of all of the different methods for determining a discount for lack of marketability (DLOM), arguably one of the most debated topics in business valuation.
This paper identifies two different theories of control premiums: One theory supposes control only benefits controlling shareholders; the other supposes control benefits all shareholders. We first examine the logical implications of each theory. We then examine the implications of each theory on the relationship between the magnitude of a control premium percentage and the percentage of controlling ownership. We analyze a database that is commonly used to quantify control premium percentages and do not find ...
Estimating Discounts for Lack of Marketability: Understanding Alternative Approaches—Put Options Versus Monetizing an Option Collar
The method for calculating a discount for lack of marketability (DLOM) has been a subject of debate for several years. Professionals have searched for alternatives to the traditional sources to quantify the DLOM. This search has led to increasing reliance on the use of financial derivatives to help determine a proxy for the DLOM. The most common derivative used to quantify DLOM is some form of put option. However, research is ongoing concerning the use ...
The accounting, valuation, and legal professions are hard at work to defeat the Treasury Department's proposed Section 274 regulations. The new regs would curtail, if not entirely eliminate, valuation discounts in family-controlled entities.
A number of leading valuation experts have called for the profession to speak with one voice and eliminate the confusion over the use of discounts. One valuation expert offers up some nomenclature and—more importantly—a framework that he hopes will help with this thorny issue.
Shannon Pratt, Roger Grabowski, Jim Hitchner, Nancy Fannon, and the Honorable Judge David Laro of the Tax Court are just a few of valuation thought leaders dubbed by NACVA as “industry titans” who gave presentations at the organization’s 25th anniversary conference in San Diego
The parties retained a sole appraiser, whom they both knew from past appraisals he had done of the company. Prior to formally engaging the appraiser, in a court hearing, both sides broached the issue of whether it was appropriate to apply a minority discount in valuing the plaintiff's shares. The court declined to weigh in on the subject, but told the parties the minority discount issue should form “part of the discussion” they needed to have over the valuation methodology.
John Finnerty (Alix Partners) has developed a new version of his average-strike put option DLOM model that can be generalized to accommodate a restriction period of any particular fixed length. He presented the new model during a BVR webinar and asked the audience for comments and suggestions. He would also like some real data for testing purposes.
March 2016 Hardcover, PDF
James Hitchner, Jay Fishman, Shannon Pratt
The case featured experts whose professional backgrounds and valuation approaches could hardly be more dissimilar. Their value determinations were light-years apart. In trying to make sense of the conflicting testimony and achieve a plausible and fair result, the court decided it could not totally trust either valuation. Although it adopted the defense expert's valuation, it made two consequential changes to it. One was getting rid of the expert's admittedly high and insufficiently explained 35% discount for lack of marketability.
A prior post that highlighted the article “NY’s Unfair Application of Shareholder-Level Marketability Discounts,” written by Gil Matthews and Michelle Patterson (both with Sutter Securities) has sparked calls for the BV profession to speak with “one clear voice” on this issue.
The greater a target company’s leverage, the less cash, or acquirer’s shares, a buyer needs to control the target enterprise. Based on this idea, the Appraisal Foundation Working Group’s Discussion Draft, The Measurement and Application of Market Participant Acquisition Premiums, recommends as a best practice that appraisers adjust takeover premia for leverage. Previous recent research found empirical results consistent with this, namely, that higher equity takeover premia are related to higher pre-deal leverage levels, controlling ...
A "new note" in the hotly debated NY DLOM issue was sounded in an article in the January issue of Business Valuation Update. In the article, “NY’s Unfair Application of Shareholder-Level Marketability Discounts,” Gil Matthews and Michelle Patterson (both with Sutter Securities) write that New York “stands alone in that it favors (and some lower courts believe requires) the imposition of a marketability discount on dissenting shareholders in fair value determinations. There is broad consensus that DLOMs should seldom, if ever, be permitted in appraisal or oppression cases.”
The parties' most recent fight focused on whether the prevailing expert's DCF analysis embedded a marketability discount to account for illiquidity. If not, the trial court had to decided what the appropriate DLOM rate was. The plaintiff-selling shareholder argued in favor of a zero DLOM, the defendants-buying shareholders presented an expert valuation that specified a 35% DLOM, based on the expert's use of a market approach.