A General Option Valuation Approach to Discount for Lack of Marketability
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 ...
What DLOM methods are now used the most?
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.
Reminder: Take our DLOM 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).
Find out what DLOM methods are used the most
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.
Two Theories of Control
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 ...
Challenge to new Section 2704 regulations is shaping up
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.
Proposed method to deal with confusion over discounts
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.
NACVA's star-studded silver anniversary conference
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
Court refuses to take stand on minority discount in buyback of shares
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.
Call for data to test new average-strike put option DLOM model
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.
A Consensus View: Q&A Guide to Financial Valuation 2016 edition
March 2016 PDF
James Hitchner, Jay Fishman, Shannon Pratt
NY fair value ruling deals blow to DLOM
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.
BV profession needs "one clear voice" in New York DLOM matter
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.
Two Methods to Adjust Observed Control Premia for Valuation Purposes
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 ...
Call for change in New York’s DLOM stance gains steam
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.”
New Jersey DLOM ruling inches ancient dissenting shareholder suit to conclusion
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.
BVR Legal and Court Case Yearbook 2016
February 2016 PDF (262 pages)
BVR (editor)
Business Valuation Resources, LLC
Business Valuation Yearbook 2016
February 2016 PDF (371 pages)
BVR (editor)
Business Valuation Resources, LLC
Control Premiums: Application and Analysis
July 2010 978-1-935081-39-5
BVR (editor)
Business Valuation Resources, LLC
BVR's Guide to Discounts for Lack of Marketability, Fifth Edition (2 Volumes)
August 2013 978-1-62150-025-4 Hardcover, PDF (644 pages)
John Stockdale Sr.
Business Valuation Resources, LLC
BVR Legal and Court Case Yearbook 2015
February 2015 978-1-62150-047-6 PDF (262 pages)
BVR (editor)
Business Valuation Resources, LLC
Business Valuation Update Yearbook 2015
February 2015 978-1-62150-048-3 PDF
BVR (editor)
Business Valuation Resources, LLC
Update on Control Premiums: What the Experts Say (PDF)
May 2015 978-1-62150-052-0 PDF (185 pages)
BVR (editor)
Business Valuation Resources, LLC
