Which option-based methods are favored for DLOM?
The Finnerty average put model is the option-based method cited the most for estimating a discount for lack of marketability (DLOM), according to our recent survey.
Good deal of interest in new option-based DLOM calculator
We were happy to see the number of readers who were interested in trying out an online calculator for estimating a discount for lack of marketability (DLOM) we announced last issue.
Interested in more support for your DLOM?
There have been some rumblings in the business valuation profession about the validity of the traditional ways to estimate a discount for lack of marketability (DLOM).
BV News and Trends November 2023
A monthly roundup of key developments of interest to business valuation experts.
New app for the Margrabe options approach to DLOM
Dr. Ashok Abbott (West Virginia University) is developing a calculator that uses the Margrabe options approach to estimating a discount for lack of marketability (DLOM).
BV News and Trends March 2023
A monthly roundup of key developments of interest to business valuation experts.
Multidisciplinary Blind Spots #5—Time
The single most important thing about valuing an interest in an asset holding company is time: How long will the interest-holder be stuck in its position? Of course, this is also a consideration for a nonmarketable position in any business. But with real estate holding companies in particular, the timing of an exit event is the single most important variable affecting value. It’s just not an easy story to write. This webinar will provide keys ...
Advanced Class on Monte Carlo Simulations
Participants will learn next-level skills in Monte Carlo simulations, such as: constructing confidence intervals, two or more random variables that are correlated, and using non-Excel software platforms (i.e., Python, Octave). Participants will also learn some VBA coding for running Monte Carlo simulations. The webinar will also present multiple Monte Carlo simulation examples, such as: contingent consideration with correlated variables, dealing with future dilutive financing rounds in an option pricing model/equity allocation framework, and option pricing ...
The Use of Monte Carlo in Valuation
Participants will understand the origins of Monte Carlo, as well as learn basic applications for use in the real world. The webinar will cover basic statistics and mathematics required to understand how Monte Carlo simulations are performed, including discussing the central limit theorem and the law of large numbers. The participant will learn how to model stochastic equity/asset processes for use in option pricing and contingent consideration valuations. The participant will learn basic Excel functions ...
BVResearch Pro adds another issue of the ASA’s BV Review
Among many other resources, the BVResearch Pro platform contains the full archive of the Business Valuation Review going back to 1982.
Double Backsolve Remains Unsupported
This article initially examines the mechanics of the established option pricing method (OPM) backsolve (OBS). It then quickly moves to a critical analysis of the more recently developed double backsolve (DBS) method, which certain practitioners have proposed as an alternative to OBS. We review the literature cited to support DBS and find it does not, in fact, support its use. In addition, we note some inconsistencies in the current use of DBS. We conclude that ...
Volatility of Financial Metrics: Important Data for Contingent Consideration Valuations
This article presents the first detailed statistical analysis of the volatilities of various commonly encountered financial metrics used in contingent consideration (and earn-out) agreements. The valuation of contingent consideration using an option-based methodology and non-equity volatilities is becoming more common in business valuation. We provide clear evidence that the volatility of five financial metrics—revenue; earnings before interest, taxes, depreciation, and amortization (EBITDA); EBIT, net income, and total assets—is strongly, negatively related to firm size and ...
BV News and Trends October 2021
A monthly roundup of key developments of interest to business valuation experts.
Option Price Modeling in Early Stage Valuation: Practical Insights
The category of early-stage companies includes startup companies, which have an initial concept, design, or business plan but, not an actual product, as well as multibillion-dollar companies with significant revenue and operations that have yet to reach profitability. The valuation of an early-stage enterprise (ESE) is based on a mix of quantitative analysis, people insight, and intuition for the company’s growth prospects. In spite of their diversity, ESEs have unique characteristics as a group that ...
Special Purpose Acquisition Companies: Practical Insights for Valuation Professionals
SPACs have become a common vehicle for management to take companies public. The valuation of SPAC shares and warrants often requires the use of more complex statistical techniques such as option pricing models and Monte Carlo simulation and a detailed review of contractual terms in the SPAC prospectus and securities agreements. Join Antonella Puca, who will focus on practical considerations and case studies. This webinar is meant to help you address the special challenges of ...
The most popular option model for estimating DLOM
Almost half (48%) of respondents to a recent survey say they use option pricing models to estimate a discount for lack of marketability (DLOM), and the Finnerty model is the one most cited, according to BVR’s DLOM survey.
Case Studies in Contingent Consideration
A significant component of the transaction price in an M&A or buyout transaction often consists of proceeds that are “contingent” upon the target company’s achievement of certain performance targets after the closing has taken place. From the perspective of the seller, “contingent consideration” represents the right to receive additional assets or equity interests from the buyer (earnout), or the obligation to return part of the proceeds from the transactions (clawback) if specified future events occur ...
BVU News and Trends January 2020
A monthly roundup of key developments of interest to business valuation experts.
Vianello offers free e-book on empirical research regarding DLOM
“When I entered the valuation field, I quickly became very dissatisfied with the available means of estimating DLOM,” writes Marc Vianello (Vianello Forensic Consulting LLC).
Size-adjusting Volatility
Since the valuation of corporate securities with option-like features issued by the private companies requires an estimate of volatility based upon comparable public companies and the comparable companies are often larger, the use of unadjusted volatilities may understate the volatility of the subject private company. This article provides an up-to-date research review on the need for size-adjusting volatility. We also present a simple methodology to size adjust comparable companies that is easily updated with data ...
Determining the Cost of Blockage by the Market-Derived Blockage Discount Model
Using option models to determine blockage discounts has been a common practice for over 20 years. As with any technique, periodic updating and improvement is to be expected. We hope this article contributes to this end. The Market-Derived Blockage Discount Model presents a mathematical means for determining the appropriate selling period in a blockage “dribble out” analysis. If we sell too much at one time, the price impact is too great. If we create too ...
Latest methodology and practices for DLOM examined
A blue-ribbon panel of experts review the primary DLOM methods and reveal new survey data on which methods valuators rely on most.