Guide to Discounts for Lack of Marketability, Fifth Edition

  • ID: 2729436
  • Book
  • Region: United States
  • 660 Pages
  • Business Valuation Resources
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In the fifth edition of BVR's Guide to Discounts for Lack of Marketability, John Stockdale, Sr. offers the newest treatise on the theories, evidence, and techniques for determining discounts for lack of marketability (DLOM).

DLOM is one of the most discussed topics in the business valuation profession with a historically wide divergence in how valuators approach it.

This valuable, two-volume resource offers practical guidance for determining the DLOM and includes a compendium with analysis of over 100 of the most important cases that have made it into the courts.

Case reviews shed light on how judges have viewed experts' use of the relevant facts and economic principles to determine a DLOM.

Highlights of this new edition include:

- Insight into the IRS view on DLOM
- Expanded commentary on the liquidity premium
- Increased coverage of restricted stock studies, now including 32 studies
- Additional insight on the factors related to restricted stock discounts
- Expanded discussion of pre-IPO studies, and minority public stock evidence
- Additional studies on the matched pairs approach and discounts in private companies
- Expanded section on volatility models, including the Sigma-DLOM Curve
- Computational methods and models including the revised Finnerty and the Ghaidarov Average Strike Put Option
- Comprehensive and easy-to-read court case summary table
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Volume One

Introduction
Chapter 1. Fundamentals of the Discount for Lack of Marketability
1.1 History of the DLOM
1.2 The Need for a Discount for Lack of Marketability
1.3 Requirements of Valuation Standards
1.4 Theory of the DLOM
1.5 Base Value and the Relevant Market
1.6 Liquidity Concepts
1.7 Insight Into the IRS View on DLOM

Chapter 2. Restricted Stock Studies, Private Placements, and PIPEs
2.1 Restricted Stock Background Data
2.2 Summary of Restricted Stock Studies
2.3 Commercial Databases
2.4 Analysis of Restricted Stock Data
2.5 A Different Type of Study
2.6 DLOM Evidence From Chinese Markets
2.7 An Analysis of the Private Placement Discount in Canada
2.8 Revenue Ruling 77-287
2.9 Limitations of Restricted Stock Studies
Chapter 2 Appendix. Rev. Rul. 77-287, 1977-2 CB 319, IRC Sec(s). 2031

Chapter 3. Pre-IPO Studies
3.1 Emory Business Valuation Studies
3.2 Valuation Advisors Database
3.3 Willamette Management Associates Studies
3.4 Criticisms of Pre-IPO Studies
3.5 Statistical Analysis of Valuation Advisors Pre-IPO Data

Chapter 4. Other Minority Public Stock Evidence
4.1 Event Studies
4.2 LEAPS-Long-Term Equity Anticipation Securities
4.3 Publicly Traded Shares in Private Equity Funds
4.4 REIT Price/Net Asset Value 'Discounts'
4.5 Bid-Ask Spread

Chapter 5. The Private Company Discount or Matched Pairs Approach
5.1 Phillips and Freeman Study
5.2 Koeplin, Sarin, and Shapiro Study
5.3 Kooli, Kortas, and L'her Study
5.4 De Franco, Gavious, Jin, and Richardson Study
5.5 Officer Study
5.6 Block Study
5.7 Dodel Dissertation
5.8 Harjoto and Paglia Studies
5.9 Private Company Discounts in the Nordic Region

Chapter 6. Observed Discounts in Private Companies
6.1 Coolidge Private Company Study
6.2 Secondary Trades of Publicly Registered Limited Partnership Units
6.3 Partnership Profiles Data About Secondary Trades
6.4 Pepperdine Private Capital Markets Project Survey Reports

Chapter 7. Factors Affecting the DLOM Derived From Restricted Stock Studies
7.1 The Underlying Cause for Discounts-Is It Only Illiquidity That Is Important?
7.2 Registration Rights
7.3 Analysis of Factors From 26 Restricted Stock Studies
7.4 Problems With Using Regression Equations Directly
7.5 Industry in Which the Company Operates
7.6 Dividends
7.7 Basic Approach for Applying the DLOM
7.8 Comments About Block Size

Chapter 8. Theory and Evidence Nexus-The Sigma DLOM Curve
8.1 The Gap Between Available DLOM Evidence and Private Companies
8.2 Analysis of Restricted Stock Data Based on Theory
Chapter 8 Appendix. Development of the Sigma DLOM Curve to Connect Theory and Evidence

Chapter 9. Volatility Models
9.1 The Chaffe Put Option Model
9.2 Longstaff Lookback Put Option
9.3 Finnerty Average Strike Put Option
9.4 Ghaidarov Average Strike Put Option
9.5 Meulbroek CAPM
9.6 Tabak CAPM
9.7 The Sigma-DLOM Curve
9.8 A Limitation of Volatility Models
Chapter 9 Appendix. Notes on Specific Factors Relevant to Testing the Models Using the Databases

Chapter 10. Practitioner Methods
10.1 Economic Components Model
10.2 VFC Longstaff Methodology
10.3 The Quantitative Marketability Discount Model
10.4 Rate of Return Method
10.5 Time Model
10.6 The NICE Method

Chapter 11. Comparative Factor Analysis
11.1 Mandelbaum Comparative Factor Analysis
11.2 Expanded Factors From the IRS DLOM Job Aid
11.3 Comparative Analysis Using the Sigma-DLOM Curve or a Mathematical Model and Factors From Restricted Stock Studies
11.4 Comparative Analysis of Restricted Stock (FMV CARS)
11.5 Comparative Analysis Using the Pluris DLOM Database
11.6 Analysis of the DLOM in the Holman case

Chapter 12. Methods for Tiered Entities
12.1 Evidence Regarding Discounts in Tiered Entities
12.2 Tax Court Cases Regarding Discounts in Tiered Entities
12.3 Income Approach Method
12.4 Asset-Based Approach

Chapter 13. Which Computational Method Should Be Used?
13.1 Longstaff Lookback Put
13.2 Chaffe Put Option
13.3 Finnerty Average Strike Put Option
13.4 Ghaidarov Average Strike Put Option
13.5 Meulbroek CAPM Model
13.6 Tabak CAPM Model
13.7 The VFC Longstaff Methodology
13.8 The Qualitative Marketability Discount Model
13.9 Stockdale Time Model
13.10 Economic Components Model
13.11 Mandelbaum Comparative Factor Analysis
13.12 FMV Opinions and Pluris Comparative Analysis of Restricted Stock (CARS)
13.13 Johnson Jefferies Park Rate of Return Method
13.14 The NICE Method
13.15 Masten Webb Tiered Entity Income Approach
13.16 Frazier Tiered Entity Asset-Based Approach
13.17 LEAPS Put Options

Chapter 14. Disposal Period
14.1 Why the Term 'Disposal Period'?
14.2 Disposal Period for Controlling Interests
14.3 Howard Frazier Barker Elliott Partnership Retirement Study
14.4 Time to Sell a Minority Interest in a Private Company
Chapter 14 Appendix. Statistical Analysis of Time to Sale in
Pratt's Stats and BIZCOMPS

Chapter 15. Estimation of Synthetic Volatility for a Private Company
15.1 Volatility Background
15.2 Determining Volatility of Financial Factors as a Minimum Indication of Stock Volatility
15.3 Getting at Volatility Through Rate of Return
15.4 Use of Guideline Companies
15.5 General Range of Volatility of Public Companies
15.6 Determining Volatility of an Appropriate Sector Index
15.7 Reaching a Conclusion as to the Appropriate Volatility

Chapter 16. DLOMs for Controlling Interests
16.1 Evidence of Controlling Interest DLOMs
16.2 Controlling Interest DLOMs in Tax Cases
16.3 Theoretical Basis for Controlling Interest DLOMs
16.4 Arguments Against Controlling Interest DLOMs
16.5 Computational Models
16.6 Example Use of Time Model to Determine a Controlling Interest DLOM

Chapter 17. Conclusion: Where We Are With DLOMs
17.1 What We Do Have
17.2 What We Do Not Have
17.3 A Suggested Overall Procedure to Determine a DLOM

Volume Two: Case Law

- Introduction
- Court Case Summary Table
- Court Case Abstracts
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