Category Archives: Business Value

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Fair Market Value and the Nonexistent Marketability Discount for Controlling Interests

This post provides a discussion of several implications of the definition of the standard of value known as fair market value. We focus first on the definition of fair market value. Next, we examine the hypothetical negotiations conducted by hypothetical buyers and sellers in fair market value determinations and the implications of those negotiations.

We then look at the implications for the so-called “marketability discount for controlling interests.” We look at this “discount” from the vantage points of the definition of fair market value, the integrated theory of business valuation, and recurring and incorrect rationales for the discount.

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It’s Not Too Late to Subscribe to the National Economic Review

A New Issue Is Soon To Be Released

Are you a business appraiser or other professional looking for a comprehensive resource to keep you informed on the major factors affecting the U.S. economy and one you can include in your work product? Look no further than National Economic Review. It was, and remains, the only regularly published economic review that is written by valuation analysts for valuation analysts. As a bonus when subscribing, you get access to almost 40 years of historical issues. Learn more about the National Economic Review and how to subscribe in this post.

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The 2023 AICPA Business Valuation Conference and One Thought on Valuation Adjustments

I have heard many appraisers suggest that one should not normalize owner compensation when valuing minority interests “because the minority shareholder cannot change compensation.” I’d like to address this issue in this post.

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Concluded Marketability Discounts in Statutory Fair Value Cases in New York

By the Numbers

This is the fourth and likely last in a series of posts on Friedman v. Beway, and a couple of other cases on statutory fair value in New York. In this post, we examine the concluded marketability discounts in 32 New York fair value cases since about 1985. When we look at the numbers, New York courts appear to be trending to conclusions of marketability discounts at or near 0%. There are, however, a small number of exceptions to this conclusion which we discuss in the post.

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Beway and Giaimo: Is New York Headed in the Right Direction?

In the final post in this series, we examine the actual marketability discounts concluded in statutory fair value matters since about 1985.  The analysis will differentiate between appellate-level and trial court cases that stand and were not appealed.  The results will likely be surprising for those interested in statutory fair value in New York.

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Beway Provides Conflicting Guidance re Statutory Fair Value in New York

This post provides a review of the 1995 New York Appellate Division, First Department case of Beway, which addressed certain “principles” guiding statutory fair value determinations in New York. It points out what appears to me to be a significant inconsistency in the treatment of marketability discounts based on the guidance from Beway. As will be shown, “equal treatment of all shares of the same class of stock” is not really equal treatment.

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USPAP Standards Rule 9-4 Creates a Problem for Business Appraisers

There were significant changes in Standards Rule 9-4 of the Uniform Standards of Professional Appraisal Practice regarding the development of business appraisals between 2005 USPAP and 2006 USPAP. The changes relate to moving from following procedures and considering approaches to a focus on developing “credible appraisal results” and analyzing “the effect on value, if any” or a number of quite specific valuation factors.

There were changes to Standards Rule 9-4(a) and 9-4(b) that shift emphasis to credible appraisal results and to introduce a focus on intangible assets for the first time. Standards Rules 9-4(c) and 9-4(d) were completely new and require appraisers to “analyze the effect on value” of a number of very specific factors that we will discuss in this post.

Appraisers who must follow USPAP, and that includes all members of the American Society of Appraisers and any appraisers conducting appraisals for gift and estate tax purposes or for other purposes involving the federal government, these standards apply. The rules apply, practically, to almost all appraisers, including those holding ABV and CVA designations.

And now for a bold conclusion at the outset: Many appraisers who focus on using restricted stock studies and pre-IPO studies as a basis for determining marketability discounts for illiquid minority interests have historically not been and are currently not providing standards-compliant appraisals for their clients.

And that’s a problem.

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Deja Vu #11: Can Restricted Stock Studies Be Used to Estimate DLOMs for Dividend-Paying Companies?

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.

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Deja Vu #10: Valuation Theory is the Same for Businesses and Business Interests: V =f(CF, G, and R)

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.