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.
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.
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.
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.
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.
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.
Recently, I was involved, for a moment, in a buy-sell agreement valuation process that had many issues. A key executive in a company was terminated. He owned about 15% of a profitable operating company, and his firing triggered the company’s buy-sell agreement provisions in its operating agreement. This was a buy-sell agreement that was virtually destined to fail unless the parties agreed to a change in the process.
I was reflecting about business problems and my experience in seeing them addressed in other organizations or in dealing with them in our own company. This post provides 11 observations on why it is critical to address business problems timely and credibly. The value of your business is directly influenced by how you resolve problems as they arise. Think of a problem identified as an opportunity for constructive change.