This 11th post in my Deja Vu series on restricted stock studies addresses the ability of any restricted stock study to help business appraisers estimate the impact of expected future dividends on the value of illiquid minority interests of companies. This is the functional equivalent of estimating and applying the marketability discount (or DLOM). The conclusion is that there is insufficient information in any restricted stock study to help estimate marketability discounts for dividend paying stocks with credibility. The same can be said for non-dividend paying companies, as well.
Business appraisers routinely use the discounted cash flow model to value entire businesses. While a growing number of appraisers use a discounted cash flow model to value illiquid minority interests of businesses (22% according to a recent Business Valuation Resources Survey), the majority of appraisers continue to rely on restricted stock studies and pre-IPO studies in their marketability discount determinations. The previous nine posts in this Deja Vu series showed the uselessness of methods based on dated restricted stock or pre-IPO studies. This tenth and final post discusses the value of businesses and business interests using the discounted cash flow model.
This 9th post in a series titled “Deja Vu” addresses the inapplicability of pre-IPO discounts or studies in determining the value of illiquid minority interests of private businesses. Pre-IPO discounts are defined. There is a visual walk-through of a pre-IPO transaction and the subsequent IPO. And there is a “picture” of the distribution of actual pre-IPO discounts from a series of studies performed by John Emory beginning in the late 1970s. The picture should be clear. Pre-IPO discounts and studies cannot be used in credible determinations of marketability discounts.
This analysis of the FMV/Stout Restricted Stock Study is the eighth in a series of posts on the tried and true restricted stock studies relied on by appraisers for many years. This post, like the previous posts in the series, questions the use of restricted stock studies as a basis for determining marketability discounts for illiquid minority interests of businesses.
This is the fourth post in a series on the historical restricted stock studies that appraisers have referenced for many years and is a review of the Moroney Restricted Stock Study. The first three posts in the series addressing can be viewed: 1) SEC Rule 14 pre-April 1997, 2) the SEC Institutional Investor Study, and 3) the Gelman Study and the Trout Study. Moroney’s central finding was that the Tax Court had embraced the concept of marketability discounts, but had been reluctant to grant discounts commensurate with their economic reality in the marketplace.
In the first post in this Deja Vu series, we discussed the Securities and Exchange Commission’s Rule 144 from a layman’s perspective as of pre-April 1997, when the mandatory period of restriction was lowered from two years to one year. The second post reviewed the SEC Institutional Investor Study, which was published in 1969. This third post reviews two more of the early restricted stock studies: the Gelman Study and the Trout Study.
In this post, we review the SEC Institutional Investor Study. This review appeared in my book, Quantifying Marketability Discounts, which was published in 1997. That book introduced the Quantitative Marketability Discount Model (QMDM) as a method to develop marketability discounts using a shareholder-level discounted cash flow model. While introducing a new method for developing marketability discounts under the income approach, I felt it was important to have a solid review of the restricted stock studies, which provide a (not very good, in my opinion) method under the market approach. Read more about the SEC Institutional Investor Study here.
The levels of value chart is one of the most important descriptive figures for business valuation. In a previous post, we gave names to the “spaces” on this chart, which are familiar valuation discounts and premiums used by business appraisers. This post focuses on why those “spaces” exist and the economic factors that create the familiar discounts and premiums.
This post recalls an appraisal review assignment of mine from many years ago. After the last seven posts where we have talked specifically about appraisal review from a broad perspective, it is appropriate to discuss one specific case where appraisal review was key to arriving at a settlement to a bitterly fought buy-sell agreement dispute.