The purpose of this post is to suggest that the key person discount, like many valuation questions and issues, can and should be examined in the context of expected cash flows, their growth, and the risks associated with achieving them.
Should business appraisers normalize excess owner compensation and perquisites, or agency costs, to market levels for similar services when valuing a non-controlling subject interest? In this post we discuss the answer to this question and the logic behind it. This post will be controversial for some readers, but we believe after reading it, you will agree.
This sixth post in a series on restricted stock discounts begins and ends by referencing all previous posts. The focus today is on the expected holding period premium, the key difference between restricted shares and otherwise identical publicly traded shares of restricted stock issuers. We discuss the reasons for restricted stock discounts and illustrate the calculation of expected holding period premiums implied by a sample restricted stock transaction.
Buy-sell agreements are often unclear regarding the interpretations of their buy-sell provisions. The subject matter of this post is a brand new Indiana Supreme Court ruling that found the valuation terms to be clear – and agreed to by all the parties. Appraised market value was considered to be the equivalent of fair market value. Since the valuation applied to the interest and not to the company, it was appropriate for the valuation expert to consider valuation discounts.
RSD-5 is the fifth in a series of posts on the restricted stock discount. We look at the importance in the similarities and differences between restricted shares and freely traded shares for the individual publicly-traded issuers of restricted stock.
RSD-4 is the fourth in a series of posts on the restricted stock discount. This post addresses what valuation discounts (or premiums) are supposed to do, and then examines the restricted stock discount in the context of valuation ratios. In short, restricted stock discounts, or averages of them, cannot be used as valuation ratios for purposes of developing marketability discounts. This will be disquieting to many valuation analysts, but it is simply true.
This post is the third in a series on restricted stock discounts (RSDs). The first post provided some basic background on restricted stock discounts. The second addressed an important question: Why are the values of illiquid minority interests almost always lower than marketable minority values? This third post looks at restricted stock discounts in light of the guideline transactions method since business appraisers have tried to shoe-horn these discounts into a valuation method for many years.
This post addresses the question of why illiquid minority interests are almost always lower than the marketable minority values of underlying companies. The answer is rooted in valuation theory and has nothing to do with the existence of restricted stock discounts. The question is addressed in light of business valuation theory and, yes, in light of the Integrated Theory.
Five recent posts on this blog have addressed the topic of restricted stock discounts. At the risk of some overlap with earlier posts, we will restart the series in a more disciplined manner. The purpose of this series of posts is to highlight the fact that attempting to use averages of restricted stock studies as a basis for determining marketability discounts (or DLOMs, if you prefer) applicable to illiquid minority interests of private companies is not a valid valuation method. We will examine restricted stock discounts in light of valuation theory, business valuation standards, and common valuation practice. The ultimate conclusion is that the common usage of restricted stock discounts as a market approach for developing marketability discounts is flawed and that valuation analysts should consider methods under the income approach that consider the expected cash flows, growth and risks associated with receiving these benefits for illiquid minority interests in relationship to the marketable minority base values to which they are compared.
Business Valuation: An Integrated Theory, 3rd Edition has been published by John Wiley & Sons, Inc. in the Wiley Finance Series. My co-author, Travis W. Harms, CFA, CPA/ABV and I are excited and relieved to have received this work in hand late last week. In this post, I will begin to tell the story about the book and why you should own it and read it.
