#5 – Addressing Comments Regarding Restricted Stock Discounts

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Two readers of this blog provided good comments to my last post, #4 – The Myth of the 25% – 45% “Typical” Range of Restricted Stock Discounts Must Die. The discussion that these comments began is important for appraisers, so their comments and my responses constitute this fifth post in the series on restricted stock studies and discounts.

#4 – The Myth of the 25% – 45% “Typical” Range of Restricted Stock Discounts Must Die

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The valuation lore with many valuation analysts who cite “the restricted stock studies” (and seldom much more) is that the “typical” range of restricted stock discounts is from about 25% to 45%, with an average of about 35%. This post addresses, and hopefully kills, this myth.

#3 – Quantifying Expected Holding Period Premiums from Restricted Stock Transactions

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This is the third post in a series on restricted stock discounts. We address the economics of the expected holding period premium over public company issuer discount rates that causes the restricted stock discounts observed in restricted stock transactions. The only difference between public company shareholders and restricted stock purchasers is the period of enforced illiquidity enforced by SEC Rule 144. When appraisers estimate marketability discounts based on averages of dated restricted stock studies, what is the implied holding period and what is the implied holding period premium? If you can’t address those questions, you will have difficulty in sustaining the credibility of your concluded restricted stock discounts.

#2 – Restricted Stock Discounts: The Expected Holding Period Premium is the Cause

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In the first article in this series on restricted stock discounts, we examined the Silber Study, which was published in 1991. In this post, we focus on the differences and similarities between restricted shares and freely traded shares of issuers of restricted stock to hone in on the expected holding period premium. This series should begin to change how you think about restricted stock discounts.

#1 – The Silber Study of Restricted Stock Discounts – 1991

We Should Have Known Then

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This is the first of a series of posts that will examine the use (or misuse) of restricted stock discounts directly to attempt to develop marketability discounts for illiquid minority interests of private companies. The Silber Study, which was published in 1991 in the prestigious Financial Analysts Journal, should have given the business appraisal profession a clue that the use of averages of studies is not meaningful.

Led by Four Trillion Dollar Companies, the Market Caps of Public Stocks Are Highly Concentrated

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The public stock markets are highly concentrated in the top 500 companies both in terms of market capitalization and earnings. This post looks at those concentrations and at the declining number of public companies. We also discuss the S&P 500 Index and the Russell 2000 Index to see how the largest public companies have fared relative to small cap stocks since the markets recognized the COVID-19 Pandemic.

When Does a Company’s Purchase Option in a Buy-Sell Agreement Become Mandatory?

Delaware Chancery Court Opinion Likens it to a Call Option

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Was the selection of the first appraiser and obtaining his result a revocable offer on the part of the Company pursuant to the buy-sell portion of the operating agreement? Was it okay to withdraw the “offer” prior to the time that Plaintiffs had accepted it? This was the Company’s basic argument. Or was the selection of the first appraiser by the Company a binding acceptance of the implicit call option that the Plaintiffs had negotiated at the time the operating agreement was signed? This was the Plaintiffs’ argument. Read this post to see what Vice Chancellor McCormick of the Delaware Chancery Court concluded.

200 Days and My Step Challenge Continues

Five Miles and 10,000 Steps or More Per Day

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Often, when we take a step, either literally or figuratively, we don’t know where that step will lead. This post is about taking 10,000 steps one day, December 15, 2019, and how, somehow, I’ve been able to do that every day for 200 days as of today. I never thought about a long goal. It has simply developed from a series of short-term goals. Hope you enjoy the post!

A Quirk with Third Appraisers in Buy-Sell Agreement Valuation Processes

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The role of the third appraiser is always to bring resolution to buy-sell agreement valuation processes. The question is how the third appraiser’s conclusion will be used to bring pricing resolution. In this post we see that one “typical” way of considering the third appraiser’s conclusion has in interesting and potentially dangerous twist for valuation processes.