Let me preface this short post by stating that I have engaged in strenuous outdoors activities since my early years.  Nothing close to what this story is about had happened to me in all of those years.  Read and heed!

The Situation

However, last Saturday was a very hot and humid day in Daytona Beach Shores, Florida.  By mid-morning, the temperature was 90 degrees Fahrenheit and the humidity was at 90 percent.

There is a public park with pickleball courts located less than half a mile from our condo.  I went to the park as I do several times per week to walk on the track there.  On reaching a distance of two miles, I went under a large pavilion to walk another mile in the shade.  I knew it was hot and took that precaution.  I had water with me and was drinking some along the way.  After reaching three miles, I got my pickleball bag and walked to the pickleball courts.

The north courts are a bit less competitive than the south courts.  I played one game on the north side to loosen up and to get warmed up for pickleball.  Then, I moved to the south courts for some more competitive play.  I played either three or four games there (I’m not sure exactly).  My last game of doubles was evenly matched, quite competitive, and long.  My partner and I won the game by a 12 to 10 score.  I noticed that I was feeling a bit uneasy during the last few points and was glad when the game was finished.

After the game, I went to a bench between the courts to sit in the shade and drink some water.  After a few minutes, I got up to play another game with the same group.  As I walked onto the court, I knew I should stop playing.  I returned to the bench where a fellow had a battery-powered fan running.  So I sat in the shade and drank more water from my bottle and from the water coolers there.  Obviously not enough water!

I could not move from the bench.  Thankfully, an angel noticed that things were not right with me.  Her name is Jeanie, and she was on the wrong side of the 12 to 10 game.  If only I had known what would shortly happen!

She gave me ice water, poured ice water down my back, and placed a cold, wet towel on my head.  She rubbed my neck and shoulders, which were hurting, trying to bring me around.  After a bit, Jeanie realized that this was not working and called 911.  The police station is less than 200 feet from the courts, and two officers with first aid materials were there in minutes.

This is Getting Out of Hand!

I don’t know how or who called the ambulance, but the crew showed up with a stretcher.  Jeanie asked me which emergency room I preferred.  I said I didn’t know but asked her to call Carol at home.  After getting me on the stretcher, I was loaded into the ambulance.  When they shut the back doors, the air conditioning began to cool things down.  Only then did I realize just how hot I had been.  They started an IV with saline solution in the ambulance.  A tech took my blood pressure, which was 90/60, or dangerously low for someone my age.

Carol called my sister, Judy, a retired nurse, and they both came to the ER immediately.  Carol and Judy called my adult kids.  They were all upset and concerned for me.  It created quite a mess.

The ambulance arrived at the Halifax Emergency Department within a few minutes, and I was taken straight back to a room.  The attending physician looked me over and had my blood pressure taken again, with the same result as on the ambulance.  He ordered another unit of saline solution, and drew blood for some testing. Judy took charge for me, talking to the doctor and the nurses.  She brought a professional sense of urgency to my situation that would not have been the same without her.

Within an hour of arriving at the ER, I began to feel somewhat better.  After a bit more than a couple of hours, the doctor had me up for a standing blood pressure, which was 119/78, or pretty normal for me.  At that point, I was weak but felt like things had turned for the better.

The blood work came back okay.  I learned that heart attacks are not uncommon in situations like mine.  Judy and the doctor agreed on one more blood test to check for damage to my heart muscles.  That process took another couple of hours and, fortunately, the results were favorable.  The doctor spoke with me briefly and said that he would discharge me.  He called my condition heat exhaustion, which is far less serious than a heat stroke.

Carol and Judy called my kids and let them know I was out and okay.  They are still concerned.

I Was Lucky

I was fortunate that my angel took charge when she did; that the ER physician and staff were prompt, courteous, and just good.  I was also fortunate that Carol and my sister Judy were there with me from almost the beginning.

Carol had brought me a change of clothes.  My pickleball outfit was absolutely drenched.  I changed clothes and was discharged, with an admonition to take it easy for a few days.  My creatinine test was a bit high, so I was encouraged to drink more water.

We arrived home and stayed there for the rest of the day and evening.  I took a nap.

Sunday morning, I was feeling better, but by the time we got home from church and lunch, I was tired and took another nap.

I cannot remember the last time I have had naps two days in a row!

It’s Monday morning. I feel at a level of 7-8 out of 10, but I know I’ve been through what the doctor and my sister called “an event.”

My Takeaways

There are a few takeaways from my experience with heat exhaustion:

• Again, I was lucky.  Jeanie took charge of a situation that could easily have gone a lot further downhill.  And I received almost immediate and effective health care.
• Overall hydration is critical.  I learned that the old rule of thumb of 8×8, or eight eight-ounce glasses of water per day, is too little fluid for active people.  A better rule of thumb seems to be to consume at least as many ounces per day as half of one’s body weight.  For me, rounding up a good bit, that would be 100 ounces of water per day.  I’m at about 80 ounces as I write this at 1 PM.  If one is exerting heavily for considerable time, even more hydration is needed.
• Constant hydration is key.  Now I remember training from my long-ago days in the military.  Constant hydration when moving outdoors is key.  When heat exhaustion hits, it hits quickly and without much warning.  And without immediate attention, heat exhaustion can turn into far more serious heat stroke.  It was not a good thing for a soldier under an officer’s care to exhibit heat exhaustion or worse.
• Don’t think it can’t happen to you.  After so many years with lots of strenuous experiences with hot weather, and without serious heat consequences, heat exhaustion caught up with me.  It can happen to anyone.
• Reading about heat exhaustion a bit, it seems as if many of us are somewhat dehydrated a good bit of the time.

Drink up!  And be well,

Chris

Regular readers of this blog know at least two things.  First, I have not posted much in recent months, and second, I have written about walking off and on for years.

I’m not promising to get back on a regular schedule of blogging.  I’m enjoying “semi-retirement” and the schedule it allows me to keep.  In this post, we look at several aspects of walking programs, including:

• How did the idea of 10,000 steps per day originate?
• What are the potential benefits of regular walking?
• Are there detriments or tradeoffs to know about?
• What does current research say about the benefits of walking?

Perhaps I will augment the discussion in future posts.

By way of background, I have been focused, to greater or lesser degrees, on exercise and movement for many years.  When the original Fitbit Tracker was introduced in 1999, I was an early purchaser.  I have been a member of “Fitbit Premium,” a program where they charge more for a few additional features, since 2001.

I was an early proponent of the benefits of walking 10,000 steps, or about five miles, per day.  So what?  I am not a medical professional.  But I have been active athletically all of my adult life even though I was more consistent for some periods and less consistent for other periods.

Beginning December 15, 2019, I began a walking program with the initial goal of walking 10,000 steps per day.  I revised the goal after some time to 5.0 miles per day, or, for me, about 10,500 steps per day.  Since that walking program began, I have walked an average of 5.6 miles per day, or 11,837 steps per day.  Yes, I do have the statistics.  More on that in a future post.

Where did the idea that 10,000 steps was some magic bromide for enhanced health come from?  Surely, it was based on scientific or medical research?  Nope.

Where Did the Concept of “10,000 Steps” Come From?

The “10,000 steps” concept originated not from medical science, but from marketing. In 1965, a Japanese company, Yamasa Clock and Instrument Co., released a pedometer called the “manpo-kei,” which translates to “10,000 steps meter.” The name was catchy, easy to remember, and aligned with the growing fitness culture in Japan leading up to the 1964 Tokyo Olympics.

The number itself wasn’t based on clinical research. Instead, it likely had aesthetic appeal — the Japanese character for 10,000 (万) resembles a person walking, reinforcing the marketing image.

Despite its commercial roots, the 10,000-step target gained traction over decades, becoming a global benchmark, especially with the rise of fitness trackers like Fitbit and Apple Watch. These devices adopted the figure as a default daily goal, turning it into a de facto standard for physical activity.

It took a while, but researchers began to study the benefits of walking and they seem to conclude that many of the benefits attributable to 10,000 steps per day are available at lower levels of activity.  We will look at some of this research later.

By the 2010s, 10,000 steps became a pop culture symbol of wellness, amplified by wearable tech, workplace challenges, and wellness apps.

What are the Benefits of Regular Walking?

As my running days became numbered by recurring injuries, aches, and pains around the mid-to-late 1990s, I turned to walking as a primary source of exercise.  I also played handball for many years, and, in 2017, I picked up pickleball as a fun form of exercise and community.

What are the potential benefits of walking 10,000 steps per day?  The following potential benefits come from some research and a bit of common sense.  Personal comments are in italics.

• Cardiovascular Health: Walking at the level of 10,000 steps per day consistently improves heart health, lowers blood pressure, and reduces the risk of stroke.  I can affirm that my blood pressure is much better than at the beginning of the program.  Full disclosure — I take a small dose of blood pressure medicine.  My cholesterol levels are much improved.  My resting heart rate averages between 65 and 70 beats per minute.  And I have avoided a stroke since beginning the program.  Lucky so far!

• Weight Management: Walking burns roughly 100 calories per mile depending on pace, weight, and terrain.  This calorie burn helps with weight control.  Your mileage may vary.  In addition, the elevated heart rate from walking helps to extend calorie burn above sedentary levels for awhile. My weight is down in the range of 16 to 18 pounds (with some variance) since December 2019.  Full disclosure — I also manage my intake of food and drink.  My goal is to burn about the same or a bit fewer calories than I consume on average and over time.  I do this mainly from habit now, rather than actually counting calories consumed.  My Fitbit Sense 2 does measure my consumption of calories with its activity algorithms, so I do measure the consumption part of the equation. We will discuss the relationship between exercise and diet in more depth later.

• Mental Health: Regular walking reduces symptoms of anxiety and depression, boosts mood, and enhances cognitive performance.  I am not anxious very often and am certainly not depressed.  I maintain a pretty good mood and my cognitive performance remains at high (for me) levels.

• Metabolic Health: Improves insulin sensitivity, reduces risk of Type 2 diabetes. My A1C levels are in the low normal range and my doctor says my risk of Type 2 diabetes is very low.

• Longevity: Studies link higher daily step counts to lower all-cause mortality.  I’m five and a half years older than I was when I started my consistent walking program.  I’m no spring chicken.  I’m an early Baby Boomer.  But my overall health remains good.  With work and a bit of luck I may be around for a fair amount longer.

• Musculoskeletal Strength: Improves joint mobility, muscle tone, and bone density (especially helpful with age).  Given my walking, a fair amount of pickleball, and a bit of exercise, I think my musculoskeletal strength is okay.  I still have all my original moving parts and they work well.

• Functional Independence: Preserves mobility and reduces fall risk as people age.  Walking strengthens my feet, ankles, and legs.  Also, when walking, I try to be sure to maintain good posture.  I’ve made it a habit to check my posture when I’m walking by reflecting windows or mirrors.  So far, I’m still as tall as I was forty years ago.  As we age, falling is a leading cause of rapid decline or death.  Flexibility also helps here, so I do some regular exercises to maintain flexibility.

All I can say is that I am all in on the benefits of a regular walking program — and my long-term goal is 5.0 miles per day or more, on average.  I have learned that it is okay to fall short on a given day.  I just make it up later.

Potential Detriments or Tradeoffs of Regular Walking

• Overuse Injuries: Risk of joint pain, plantar fasciitis, shin splints, or stress fractures if shoes, terrain, or biomechanics are poor.  I haven’t had issues with walking injuries, thankfully.  During my running years, I had plantar fasciitis, shin splints and assorted other injuries.  For me, walking has mitigated most of these issues.  I did have issues last year with the meniscus on both my left and right knee.  After one cortisone shot and use of good knee braces, I’ve worked through those issues.  

• Time Commitment: About 75–90 minutes daily depending on pace — significant, especially for busy professionals.  It does take time to walk 10,000 steps or 5.0 miles.  During my running years, I could consistently run 5 miles in about 40-45 minutes.  It takes longer to walk the same distance.  I think of the time commitment this way.  I need a block of about an hour, give or take, to walk ~3.5 miles in the morning.  If I am conscious of movement during the rest of the day, it is usually no problem to hit 5.0 miles.  On pickleball mornings, I play 2-2.5 hours and normally get 3.5 to 4.0 miles during each session.  It is downhill from there for the rest of the day.  The bottom line is that any form of regular exercise or sports participation requires a significant commitment of time.

• Diminishing Returns: Beyond a certain step threshold, some studies show that added benefits flatten out.  I have not yet experienced what I believe to be diminishing returns from my walking program.

• False Sense of Fitness: Walking alone, especially at slow pace, may not provide adequate cardiovascular conditioning or muscle strength for some goals.  I don’t believe that I am experiencing a false sense of fitness.  I do walk alone most of the time, but at pace.  Based on my heart rate monitor, I am walking in a fitness zone.

In short, I have not experienced what I believe to be any adverse trade-offs from walking an average of 5.6 miles per day for the last five and a half years.

We now look at research that suggests that fewer steps than 10,000 per day can provide significant benefit.

Research Suggesting Walking Less Than 10,000 Steps per Day Provides Significant Benefits

Some studies indicate that significant health benefits are available to levels of walking significantly below 10,000 steps per day.  One prominent study was conducted at the Harvard Medical School.

Harvard Medical School / JAMA Internal Medicine (2019)

The study is named as Association of Step Volume and Intensity With All-Cause Mortality in Older Women.

The authors include I-Min Lee, MBBS, ScD; Eric J. Shiroma, ScD; Masamitsu Kamada, PhD; et al.

The study design is described in the abstract of the article as:

This prospective cohort study included 18,289 US women from the Women’s Health Study who agreed to participate by wearing an accelerometer during waking hours for 7 days between 2011 and 2015. A total of 17,708 women wore and returned their devices; data were downloaded successfully from 17,466 devices. Of these women, 16,741 were compliant wearers (≥10 h/d of wear on ≥4 days) and included in the analyses, which took place between 2018 and 2019.

The findings of the article are summarized in the abstract as:

In this cohort study of 16,741 women with a mean age of 72 years, steps per day were measured over 7 days. Women who averaged approximately 4,400 steps/d had significantly lower mortality rates during a follow-up of 4.3 years compared with the least active women who took approximately 2,700 steps/d; as more steps per day were accrued, mortality rates progressively decreased before leveling at approximately 7,500 steps/d.

This study suggests that mortality continues to decrease with more than 4,400 steps per day and levels off at about 7,500 steps per day.  As for me, I’ll continue to aim for the higher level of 10,000 steps per day.

2022 Meta-Analysis / The Lancet Public Health

The next study is named as: Daily step count and all-cause mortality: a dose–response meta-analysis of prospective cohort studies.  It was published in The Lancet Public Health in March 2022.  The authors were: Amanda E Paluch, Shivangi Bajpai, David R Bassett, et al.  Quoting from the study’s introduction (footnotes omitted):

Physical activity can reduce morbidity and mortality due to multiple chronic conditions, including cardiovascular disease, type 2 diabetes, and several cancers, and is associated with better quality of life. The number of steps acquired per day is a simple measure of physical activity. Monitoring daily steps is more feasible than ever for the general public as fitness trackers and mobile devices have become increasingly popular.   Although the goal of 10 000 steps per day is widely promoted as being optimal for general health, it is not based on evidence, but instead originates from a marketing campaign in Japan.

Some of the study’s findings are summarized here:

In this meta-analysis of 15 studies, seven published and eight unpublished, we found that taking more steps per day was associated with progressively lower mortality risk, with the risk plateauing for older adults (aged ≥60 years) at approximately 6000–8000 steps per day and for younger adults (aged <60 years) at approximately 8000–10 000 steps per day. We found inconsistent evidence that step intensity had an association with mortality beyond total volume of steps…

There are currently no evidence-based public health guidelines recommending the number of steps per day for health benefits. Our findings suggest mortality benefits, particularly for older adults, can be seen at levels less than the popular reference of 10 000 steps per day.  Adults taking more steps per day have a progressively lower risk of all-cause mortality, up to a level that varies by age. Our findings can be used to inform step guidelines for clinical and population promotion of physical activity.

More specifically, the study observes:

In this meta-analysis of 15 studies, seven published and eight unpublished, we found that taking more steps per day was associated with progressively lower mortality risk, with the risk plateauing for older adults (aged ≥60 years) at approximately 6000–8000 steps per day and for younger adults (aged <60 years) at approximately 8000–10 000 steps per day. We found inconsistent evidence that step intensity had an association with mortality beyond total volume of steps.

We did not find that high step volumes [greater than the ranges above] were associated with increased risk of mortality…(emphasis added)

The Lancet Public Health Study finds that a range of 8.000 to 10,000 daily steps is where mortality risk plateaus for those under 60 years of age.  That to me seems close to affirming that 10,000 steps per day is in a healthy range.  Since I am in the over 60 years group, I can affirm that averaging more than 5.0 miles per day for five and a half years has helped keep me alive so far!  At least, this study finds that higher step volumes do not appear to be harmful and to increase the risk of mortality.

There are a number of other studies, but their overall conclusions can generally be summarized in the following table.

Step Count                               Health Impact
Under 4,000/day                       Sedentary, elevated health risks
4,000–6,000/day                       Noticeable reduction in mortality risk, improved mobility
6,000–8,000/day                       Strong cardiovascular and longevity benefits
8,000–10,000/day                     Additional, but smaller, incremental benefits
10,000+ steps/day                    Maintenance, enhanced endurance, mental boost (possible wear/tear issues)

While the two studies discussed above control for broad lifestyle variables (e.g., smoking, BMI, some dietary habits), I am aware of no studies yet that attempt to determine any synergistic impact of walking and diet on longevity or general health.  Common sense suggests that there would be synergistic benefits from regular walking and maintaining a sensible diet.

Wrapping Up for Today

The original concept behind 10,000 steps per day was not developed as result of medical research.  It was a marketing idea by a Japanese company designed to sell their line of pedometers.  The concept caught on in popular culture before medical researchers began to dig in and study.  Research and common sense suggest that regular exercise over time is conducive to better health and longevity.  Is 10,000 steps the magic bullet for better health and longer lives?  I don’t know that there are any magic bullets for success in any area of life.  However, regular walking over an extended period has measurably improved my health and helped me to lose significant weight and keep it off (mostly) over an extended period.

The so-called detriments or trade-offs noted above seem fairly weak to me and are not trade-offs at all.  That is just me.

A Walking Goal

On December 15, 2019, I made a decision that, with follow-through, has been life-changing.  I decided that I would walk 10,000 steps per day and hoped to bring my body back into more reasonable condition and health.

When I made this decision, my weight was 212 pounds, my cholesterol was too high, my blood pressure was too high, and well, numerous other blood statistics were also out of whack.  I was almost 72 years old, and knew I needed to turn things around.

After a time, I changed that daily goal to the slightly farther distance of five miles per day.  But that is inconsequential to the story.  The goal was to walk and exercise more.  I had been playing pickleball since early 2017, and that sport was a part of my plan.  Fortunately, my Fitbit Sense 2 measures steps pretty accurately when I am playing.  I also knew that a better diet, i.e., paying attention to what I eat and drink, would be an integral part of the overall plan.

A Wake-Up Call

Some 90 days into my walking program, and having not missed a single day of hitting my walking goal, on March 15, 2020, the Covid-19 Pandemic shutdown was put in place.  I had been walking at home, work, my club, the streets, and anywhere I found time and space to walk.  But we all were sent to work from home.

With the shutdown came some bad weather in Memphis and it snowed a good bit and was cold.  I remember being tempted to let things go, but I was experiencing favorable changes in my weight and physical (and mental) well-being, and did not want to stop.

I became even more intentional about my walking through the pandemic. I talked to people and read about what came to be called the “pandemic bulge,” or the fact that many people who were working from home began to gain weight.

The times caused me to reflect on ways to maintain physical and mental health in pandemic times.  On May 1, 2020, I posted a video titled A Dozen Things to Try to Maintain Physical and Mental Health in Pandemic Times.  (the text is transcribed)

I spoke about creating a good workspace at home, limiting work hours to a reasonable level (initially, many professionals were working longer than normal hours while at home), and a number of other things, including attending church services online.

The item on my list that has meant the most to me, however, was simple: Create a “one plate per meal” rule for all meals.  Of course, a small salad might come on a separate plate, but the essence of the rule is to eat one reasonable plate of food per meal.  And, an occasional small dessert is okay.

I did have a couple of negative suggestions.  First, try not to let oneself fall into the “I need a snack” trap.  And second, don’t watch too much television.  You can guess why for both of these.

A Balance of Exercise and Diet

Before writing another word, let me say that I am not a physician.  I know there are a number of issues that can make getting fit and losing weight difficult, or even impossible at times for some people.  However, based on what I have read and experienced in life thus far, the ideas and “rules” that I write about do apply to most men and women.

In the referenced post of suggestions for maintaining physical and mental well-being, I was alluding to what I call one of the “Great Equations of Life.”  The equations for weight are simple:

Calories Consumed > Calories Expended => Gain Weight at the Margin

Calories Expended > Calories Consumed => Lose Weight at the Margin

Calories Consumed = Calories Expended => Maintain Weight

About this time, I read about something called the Basil Metabolic Rate (BMR), which is defined at www.Calculator.net as:

“the amount of energy expended while at rest in a neutrally temperate environment, and in a post-absorptive state (meaning that the digestive system is inactive, which requires about 12 hours of fasting)”

Said another way, the BMR measures the calories one would consume while acting like a slug.  The same link provides what is known as a BMR Calculator, which, given one’s height and weight, calculates one’s BMR.  I calculated my BMR just now and discuss the results below the figure:

The calculator has three choices for underlying formulae for calculating BMR.  I used the first one and my BMR is about 1,650 calories per day, or roughly 70 calories per hour for upkeep alone.  Above the level of our BMRs, each of us has reasonable control over the total calories we actually consume and expend on a given day and over time.

At various levels of activity, my expected daily calorie expenditure ranges from about 2,000 calories per day for little or no exercise (sedentary) to just over 3,100 calories per day with intensive exercise (2 hours per day of elevated heart rate) or a physical job.  My primary takeaway from reading about the BMR is that our level of activity above above slug level determines the amount of calories we can consume to maintain gain, lose, or maintain weight.

It was time to begin to monitor my caloric expenditure over time.  Fortunately, my Fitbit Sense 2 watch estimates daily caloric expenditure based on its algorithm using my basic information.

I have never actually counted calories consumed for anything more than a day or so.  However, from a beginning weight of 212 pounds (December 15, 2019), my weight had dropped 16 pounds to 196 pounds by year-end 2020.

My average daily expenditure during 2020 was 3,286 calories per day according to calculations made based on Fitbit’s recordings each day.  As my weight began to drop, I became pretty good at guesstimating my caloric consumption, which was clearly less than 3,286 calories per day.

According to the Mayo Clinic, a pound of body fat is roughly the equivalent of 3,500 calories, so to lose a pound of body weight, one must consume, over some time, 3,500 calories less than one expends.

My 16 pound loss in 2020 meant that I consumed about 56,000 fewer calories (16 x 3,500) than I expended (1.2 million in the leap year).  Simplistically, I consumed about 4.7% less calories than I expended, or about 150 calories per day, on average.

Did I starve?  No.  The calculation is that I consumed about 3,133 calories per day on average during 2020.  No normal “diet” will allow one to eat and drink that much.

However, the combination of exercise (4.7 million steps and 2,236 miles during 2020) and eating and drinking reasonably well allowed for a significant weight loss in the first year of my walking program.  My doctor was pleased with other aspects of my health, including lower cholesterol, lower blood pressure, lower resting heart rate, and more.

The Real Program

The program that has worked for me is more than a walking program, although that is what I have called it.  The program is a combination of exercise (walking and other, including pickleball) and diet that, working together, have enabled me to get to more realistic weight and health levels than when it began in late 2019.

I have tried to keep a reasonable relationship between activity and diet during the more than five years since I consciously decided to walk 10,000 steps (or 5 miles) per day.  If my weight goes up a bit, I focus on exercise and diet to bring it back down.  The five year history includes first quarter of 2025 and is summarized here:

At some point, I realized that circumstances, sick days, and other interruptions occasionally made it impracticable to achieve my daily goal.  After some reflection, I accepted that there would be a few of those days along the way.  So I adjusted the goal to a minimum of 35 miles per week.  If I fall short on a given day, there are six other days in every week to make things up.

After such success during 2020, I got ahead of myself in 2021.  Although I expended 3,138 calories per day, I consumed more than that and gained five pounds.  I had averaged more than 6 miles per day in both 2020 and 2021 and knew that I would not reasonably be able to get back on track with more walking.  At that point, I realized that I would have to adjust my diet somewhat in order to get back on track.

I did that in 2022 and 2023, and my weight dropped from 201 pounds at the end of 2021 to 197 pounds at the end of 2022 and farther to 195 pounds at the end of 2023 (on somewhat lower mileage).

Unfortunately, I experienced a couple of injuries in 2024 that slowed my walking program a bit.  I did not adjust my caloric intake sufficiently to account for the reduction in activity, and my weight rose a bit to 197 at the end of that year. My walking dropped to 4.7 miles per day during 2024.  While that might not seem like a lot relative to a goal of 5 miles per day, the difference came in the mix of my activity.  Post-Covid shutdown during 2020, and during 2021, 2022, and 2023, a significant number of my steps came while playing pickleball and other exercising.  I was pretty much shut out of pickleball for a good bit of 2024, so the intensity of my activity was lower.  And I kept consuming calories at the pre-injury rate.

By late 2024, my injuries were healed and my pickleball and walking picked up.  Over the first quarter of 2025, my weight dropped to 193 pounds, or to a point I had not seen over any period of time — and not at my year-end measurement dates.  To lose that weight, I have had to adjust my caloric consumption a bit relative to my activity level.  There is no “diet,” but I do maintain my one plate per meal rule for the most part.  I often eat an appetizer and small salad when dining out, and I am aware of other sources of calories, including alcohol.

The great weight equations of life noted above hold true for me as is evidenced by the history shown in this post.  They may well hold true forIs you.

I0,000 Steps (or 5 Miles) Too Much?

According to the Mayo Clinic, a regular walking program can reduce the health risks associated with:

• Heart disease
• Obesity
• Diabetes
• High blood pressure
• Depression

But a number of studies indicate that walking about 7,000 steps per day, give or take, will provide all the benefits that walking 10,000 steps per day.  However, there is one benefit to walking the extra 3,000 steps per day — one will expend more calories than at 7,000 steps per day.  To me, that means I have a bigger and better dietary budget than I would have at lower step levels.  That’s important to me.  Walking alone does help to lose weight unless combined with a diet that balances with or is less than our activity levels in terms of calories.

If you are thinking about a walking/exercise program and are willing focus on diet as well, then my recommendations include:

• Obtain a smart watch that measures walking and other physical activities — and use it.  If you already have an Apple watch or another smart watch, then figure out where to look to see your daily results.
• Weigh yourself on a set of scales, preferably smart scales that will sync with your phone.  That’s your base weight.  Try to weigh at the same time each day.  For me, that is after getting up, walking the dog, and before any breakfast.
• Don’t try to think about a diet, but begin to become conscious of your dietary and liquid choices.
• Initially, spend two weeks wearing your watch every day and determine what your mileage (or daily step count) is before starting to focus on walking.  Assume, for example, your daily average is 4,100 steps, or just under two miles based on my personal stride (your stride may vary).  The average person walks about 1 to 2 miles per day (according to the Mayo Clinic) as a point of reference.
• From that base, set an interim goal — say 5,500 steps per day for a month.  I used to think that my goal had to be met every single day.  I now know better and seek to meet the goal on average over each week and month.
• At the end of a month, get on the scales and weigh again.  Your weight will be up a bit, down a bit, or about the same as your base weight.
• Based on the information you learn about your body in the first month, you can begin to adjust your walking goal and/or your consumption of food and drink.
• If you like your program, continue with it at the level that is comfortable for you.  But I do recommend weighing daily.  A little plus or minus on a given day or two or three can provide the incentive to make adjustments as you see fit.

Is there anything magic about 10,000 steps (or 5 miles)?  No, but my walking a five-year plus average of 11,880 steps per day (5.6 miles per day) has certainly helped me, and without injury from walking.  The injuries I mentioned earlier came while playing pickleball.

Wrapping Up

Why have I written about my walking/exercise and caloric intake watching program over the last five years?  First, it is helpful to me to talk about the results of this long-term program.  It helps to keep me motivated.  Second, a significant number of people have responded to my blog posts, the postings on LinkedIn and my speaking about walking from time-to-time.  Quite a few folks have said that reading or hearing about this program has been helpful and motivating to them on their personal journeys to fitness and better health.  That is a wonderful side-benefit.

What does the future hold?  I don’t know, but, as they say, “If the Good Lord’s willing, and the creek don’t rise,” I’ll keep on walking and exercising and watching what I eat and drink to maintain a healthy balance.

What I do know is that the Good Lord is willing.  He is willing, I hope, to allow me the opportunity to continue this journey for many more years.  But I have to maintain the program on my own.  As do we all.

Yesterday represented an important milestone for me.  It marked the fifth anniversary of a walking program I began on December 15, 2019.  What led me to that commitment was the result of too much travel, and too little regular exercise.  In the period leading to the start day five years ago, my weight had risen to a whopping (for me) 212 pounds, and my conditioning was not stellar.

The Covid-19 Pandemic Solidified My Walking Program

Everyone was sent home in March 2020 as a result of the COVID-19 outbreak. Thankfully, I took the time during those months at home to continue the walking that I had begun just a few months before.  Lots of folks experienced a “pandemic bulge” during the work-at-home phase of the pandemic.  However, as the pandemic progressed, I developed a few “rules” for maintaining physical and mental health during pandemic times, and they are pretty sound today.  In summary, they were (with current comments in parentheses):

• Set up a home office (it is still good to have one!)
• Use Zoom to communicate (my goodness do we use Zoom/Teams going into 2025)
• Connect with two to three people a day (that’s always a good habit)
• Coffee, water, water, coffee (the news re the goodness or badness of extra coffee is mixed today)
• Stop work at 5:30 or 6 o’clock (Still a good rule for the most part – there are always exceptions)
• 10,000 steps per day or exercise regularly (I now use 5 miles per day as the goal, which is a few extra steps over 10,000)
• One plate rule at meals (this simple rule has helped me maintain weight at a more reasonable level than when my walking began)
• Two drinks rule at night (well, I’ve broken that a time or three, but the point is be aware and moderation)
• Read a novel (good for the mind and the soul)
• Get about 8 hours of sleep each night (I’m still keeping this up – my average time sleeping has been 8 hours 7 minutes per night for the last year)
• Go to church services online (now that churches have been worshipping in person for a long time, I do prefer to attend services rather than view them online)

It will be rewarding.

And a couple of things I don’t recommend:

• Don’t fall into the “I need a snack” trap and (snacks are a great way to break the “one plate per meal” rule)
• Don’t watch too much TV (too much TV is mind-numbing, at least to me)

Overall Results

After five years of walking, one of the best results is that my weight is under control – not completely if I’m honest, but for the most part.  From the starting point of 212 pounds, my weight has dropped as low as 192 pounds.  But it has risen from those lows to 202-203 pounds.  When that happens, I focus more keenly on both diet and exercise.  Currently, my weight is stable at about 195 pounds.

The focus on exercise and weight has created additional health benefits.  Cholesterol and blood pressure were not in the appropriate ranges at the start.  Both are much better and pretty much normal (and my doctor is pleased).  All other blood work is “normal,” thankfully!

Little did I know when I committed to a walking program on December 15, 2019 where that program would lead me.  After five years, I’ve walked a fair amount, as summarized in the following table.

Lots of steps and lots of miles.  Rather than the original goal of 10,000 steps per day, I’ve averaged 12,263 steps per day, and 5.8 miles per day.  That’s better than originally anticipated.  Keep in mind that my Fitbit also picks up steps when I play pickleball, which I do with regularity.

Importantly, note that since August 29, 2023, my daily average miles is 4.88 and not 5.0.  On that day, I incurred an issue with the meniscus in my right knee.  That shut me down for awhile and slowed me down for a longer time.  Then, in April of 2024, I had an (assisted) fall on the pickleball court. I hit the floor with my left hip and my partner fell on me and crunched my right hip and right shoulder, not to mention bruising ribs.

That slowed me down a bit more.  Thankfully, all is better now with the exception of occasional pain in a hip.  But I still walk.

What these adversities have taught me is that a walking program is not about what we do today.  It is all about what we do over time.  Given the impact of a lingering sinus infection on my body and mind, I walked only 3.1 miles and 3.2 miles on December 14th and 15th.  What I’ve come to realize is that it is okay to fall short on a given day if I don’t lose sight of the longer-term goal.

I can honestly say that at the outset, I felt that failing to meet a day’s goal was a failure for my walking program.  I walked less than five miles only six times in the first 900 days.

Today, I have learned that the walking program is a long-term program in pursuit of long-term benefits.  If I fall short for a day or three now, I just get back up and walk.

A Few Thoughts for the Future

On this first day of the sixth year of my walking program, I’m thinking about a few things:

• I will keep walking with a longer-term average in excess of 5 miles per day.
• I hope to get a larger portion of those steps playing pickleball in Memphis, Daytona Beach, and wherever my travels take me.
• I plan to continue to exhibit moderation in my diet and alcohol consumption.
• With five years in the bag, I’m setting one more goal.  My scales are linked to the Feelfit app, which tracks weight and several other health-related indicators.  My Body Mass Index (BMI) is 26.1, which the app shows as modestly overweight.  I have that!  To get to the green (normal) range, my BMI needs to drop to just below 25.0, which would correspond to a weight of about 186.5 pounds, or about 8.5 pounds.  Here goes.

These “walking” posts have nothing to do with business appraisal, but writing them over the past five years has helped me maintain focus on my program and goals.  Many people have told me that reading these posts has encouraged them to begin walking programs of their own.

A Few Thoughts for Consideration

Is a goal of 10,000 steps or 5 miles the appropriate goal for everyone?  Probably not.  Some may want to set higher goals and others will set lower goals.  In an article published in 2019, the National Institute of Health summarized findings as follows:

After five years of regular walking, I can say that a goal of 5+ miles per day works for me.  Does it take time?  Yes.  Does it take intentionality?  Yes, again.  Does 3 miles, 4 miles, 5 miles, or 8 miles per day guarantee fitness and weight control?  Sadly, no.

Let’s talk about time.  When I started this program, I was almost 72 years old and I was still working way too much.  By being intentional about time, I was able to achieve my walking goals early on. I won’t comment on my current age, but age-adjusted, I seem to be in pretty good health and spirits!

Over the last five years, I have slowed down on the work front with the help of my colleagues at Mercer Capital.  My colleagues control our company through the Mercer Capital ESOP.  They have managed the company since 2009.  I now call myself semi-retired and work on interesting projects and am reasonably active in writing and speaking activities.

Interestingly, it is sometimes as or more difficult to maintain my walking with my reduced schedule than when I was overworking.  Other things seem to get in the way.  But I will keep my feet on the ground and walk on.

A regular walking program combined with reasonable control or food and drink will almost surely be good for health and fitness.  Remember the great equation(s) of life, which is the relationship between calories consumed (CC) and calories expended (CE).  This relationship holds per day, but it is best considered over time:

CC < CE = Weight Gain

CC > CE = Weight Loss

CC = CE = Weight Maintenance

I can tell from personal experience and my annual physicals that regular exercise and diet control have been good for my physical and mental health.  To reach my additional goal of a BMI less than 25.0, I will have to pay attention to the above equations.  Sadly, I’m not likely to exercise at a much higher level than above, so I’ll have to work some on the diet and drink side to achieve it.

If these posts have been interesting, thought-provoking, and/or motivational, I’m grateful.  Writing them has been all three for me over these past five years.

I’m looking forward to the next five years of my walking program.

Until next time, be well!

Chris

I began a regular walking program on December 15, 2019, just before the COVID-19 panic set in, or about 4 years and 10 months ago.  I’ve written about this in a number of blog posts since then, but not since November of 2023.  When I go places or talk with friends by phone or Zoom, I’m frequently asked the question: “Are you still walking?”

The short answer is “Yes,” but life has a way of interfering once in a while.  In November, I reported:

September [2023] was a light month.  I tore or twisted my right meniscus on August 28.  Needless to say, after a cortisone shot and an exercise regimen from an ortho doc, my walking was curtailed a bit.  I averaged less than 4 miles per day until late in September when I began to be able to walk more normally.  Since then, I’ve averaged about 5.5 miles per day.

The meniscus seems to be doing well now.

However, in April 2024, I played pickleball at a new indoor court in Memphis.  It was a renovated theatre, and the courts were concrete and hard.  We were playing the last game of a two-hour session, and my partner and I were ahead 12-11 (games to 11 and win by two).  The opposing side hit a lob to the left back of the court where I was playing.

I went for the lob.

So did my partner from the right side of the court.

He hit me and knocked me down, and I hit my left hip and shoulder going down.

But wait, there’s more.  My partner, who was about 6’2″ and weighed, I’m guessing, about 230 pounds, give or take, then fell on my right side.  I don’t know exactly what happened, but he fell on my right hip and shoulder, turning my right shoulder sharply to the left, bruising ribs badly in the process.

As it turns out, my left hip and shoulder were better off than my right side.  Nearly six months later, I have remnants of an ache in my right shoulder and a recurring ache in my right hip.  I got a cortisone shot for my shoulder and it is much better.  The orthopedic doctor gave me some exercises for the hip, and they are beginning to help.

I’m still playing pickleball, but I have not yet played again with that partner since that day.

I digress.  I’m still walking as well.  But those two injuries have slowed me down a bit, although I seem to be returning to my prior form.

Since December 15, 2019, my walking program has the following summary statistics:

• As of September 30th, I had walked (sometimes not for 5 miles) for 1,752 days.
• That amounts to 10,277 miles or 5.9 miles per day
• And 21.7 million steps, or 12,370 steps per day

Since late August last year, with two injuries slowing me down, I have averaged 4.9 miles per day, which is down a bit from my long-term average. This has pulled the overall average down from well north of 6 miles per day.

But I’m still walking.  And guess what?  I’m almost five years older than when I started and, age-adjusted, am in pretty good shape.

If you are walking regularly, keep it up.  If you tell yourself you need to walk regularly, then say so emphatically and get started.  No walking, no benefits.

I hope all readers are well and beginning the close of a very successful and happy 2024.

Chris

Something triggered my thinking about my days as a bank stock analyst with Morgan Keegan & Company in Memphis (now part of Raymond James) in the late 1970s and early 1980s.  They had been without a bank analyst for quite some time when a seasoned analyst they thought they had hired did not show up.  I had good experience as a financial analyst at First Tennessee National Corporation (now First Horizon Corporation) where I had been assistant treasurer, but no experience as a bank research analyst.  The fact is that Morgan Keegan followed about twenty regional bank stocks and their equity salesmen were crying out for ongoing research and recommendations on those stocks.

Somehow, I began to learn what being a bank stock analyst was all about.  I figured out that I needed to create something that could give me a bit of an edge.  What I developed was a ranking scheme that looked at my 20 bank holding companies (BHCs) in a disciplined manner.  So I created an analysis that looked at these BHCs through about a dozen filters, including, of course, return on equity, return on assets, leverage, and more.  Then I developed a “proprietary weighting scheme” that enabled me to rank the banks. That may seem simplistic, but the time was before the first personal computer showed up at Morgan Keegan.

I had to learn to interview BHC CEOs on quick notice.  The good news is that they wanted to talk to me in the hopes that I would publish about them favorably and recommend their shares to our retail and institutional sales groups.  Learning my new gig was like drinking water from the proverbial fire hose!

I began to be asked to have calls with institutional clients by our salesmen.  In these calls, I’d talk about the market environment for bank stocks and focus on my top two or three recommendations.  I apparently became pretty good at it, because our salesmen were selling lots of OTC regional bank stocks — which at the time, provided nice and juicy commissions.

There is more to that initial learning experience, but this short intro sets the stage for the today’s important success lessons.  I was asked by Morgan Keegan’s top equity salesman, G Walter Loewenbaum, II (“Wally”) (I could find nothing more current on Wally), to travel to London, Edinburg, and Paris, to call on some of Wally’s institutional clients.  At the time, I was 31-32 years old. As it turned out, one evening, we had no client dinner scheduled, and Wally and I went to dinner together.  After some conversation, I asked Wally what was, to me, an important question.

I asked, “Wally, what is the secret of your success?”

He reflected for a moment, and then continued our previous conversation.  I thought for a bit that he was avoiding answering, but then, he said words very similar to what I will place in quotation marks:

“Chris, most brokers don’t lose clients because they lose money for the clients.  If you are in this business, you will lose money from time to time.  They lose clients because they ignore their clients while they are losing money.  So, don’t ignore your clients in bad times and you will keep them.”

Wally was a big proponent of investing alongside his clients.  If he asked clients to take a position in a stock, Wally took a significant personal position in that same stock. His clients knew that he was feeling their same pain when the market was down. He went on:

“Chris, the secret to my success, whatever that is, is in one word — MOMENTUM.  If you have momentum, you have to do everything in your power to maintain it.  And if you don’t have momentum, you have to do everything in your power to regain it.”

Wally and I continued the conversation during the remainder of dinner.  I don’t remember the rest of the conversation that evening  (in Edinburgh, I recall), but I have never forgotten Wally’s answers to my question of the “secret” of his success.  I have repeated this story many times in the more than 40 years since dinner that evening with Wally.  So we will end this short post with a bit of repetition since I have adopted Wally’s advice and tried to follow it over the years.

What is the secret of professional success?  We have just talked about two such “secrets.”

1. When times are tough, keep in touch with your clients and don’t ignore them.  They want to know you are sharing that pain.  Obviously that’s easier when times are good, but the lesson remains the same.
2. If you have momentum in your professional life, do everything in your power to maintain it.  If you don’t have momentum, do everything in your power to regain it.

Come to think of it, these two “secrets” could have application in our personal lives as well.

Be well,

Chris

Introduction and Conclusion

My musings on the use of restricted stock discounts to estimate marketability discounts (or DLOMs) have led me to the conclusion: Restricted stock studies/discounts cannot be used to estimate DLOMs in any credible, standards-compliant manner.  Three of the first four Mercer’s Musings posts address this issue.

• Mercer’s Musings #1: USPAP and the Internal Revenue Service
• Mercer’s Musings #2: Using Restricted Stock Studies to Support Marketability Discounts
• Mercer’s Musings #3: Marketability Discounts re Two Hypothetical Minority Interests
• Mercer’s Musings #4: Factors to Consider in Valuing Partial Ownership Interests

This fifth post in the musings series takes a look at the usefulness of pre-IPO discounts in estimating marketability discounts.  Astute readers will know the conclusion of this musing at the outset.  To give the answer away: Pre-IPO discounts/studies cannot be used to estimate DLOMs in any credible, standards-compliant manner.

What is a Pre-IPO Discount? – 1

Begin at the very beginning.  A pre-IPO discount measures the difference between the price at which a transaction occurred in an illiquid minority interest of a company relative to the price at which it subsequently went public by engaging in an initial public offering (IPO).

Exhibit 8.21 (Mercer-Harms Business Valuation: An Integrated Theory Third Edition) (“IT3”) illustrates how pre-IPO discounts are calculated.  The hypothetical, pre-IPO transaction in this example occurred at a (split-adjusted) price of $6.50 per share, and the subsequent IPO price was $13.00 per share.

The calculated pre-IPO discount is 50% in the example, and is consistent with the medians and averages of discounts found in several older pre-IPO studies (which are cited in Chapter 8 of IT3.  The question is: What does that 50% pre-IPO discount mean or imply for the valuation of illiquid minority interests in private companies today?

Economic Information in Pre-IPO Discounts?

As with control premiums and restricted stock discounts, it is clear that the pre-IPO discount measures only the difference between two prices.  The information we can glean from this definition and example is limited to the following:

• A transaction occurred at some point prior to an IPO (perhaps three months, six months, nine months, or a year or more)
• The pre-IPO price was $6.50 per share
• The price at the subsequent IPO was $13.00 per share
• The pre-IPO price was $6.50 per share, or 50% lower than the IPO price
• The IPO price was $6.50 per share higher than the pre-IPO price, or 100% higher than the pre-IPO price

There is no direct economic information in this example of a pre-IPO discount that can shed light on the appropriate marketability discount for any private company.  Further, there is no direct economic information in any averages of groupings of pre-IPO discounts that can shed light on appropriate marketability discounts for any private companies.

As with the restricted stock studies examined in earlier posts in this series (linked above), there is no economic evidence in the older pre-IPO studies cited in IT3 (Emory, Willamette, Hitchner, etc.).  The older studies cannot provide help in developing marketability discounts today.

What is a Pre-IPO Discount? – 2

The disconnect between a pre-IPO discount and any bearing on valuing illiquid minority interests of private companies (and marketability discounts) becomes clearer in a picture.  The following figure is adapted from Figure 8.26 of IT3.

Examining the same hypothetical transaction, we find:

• A pre-IPO transaction occurred six months prior to the date that a hypothetical company engaged in its initial public offering.  That transaction took place at $6.50 per share.  See the left side of the figure above.
• Whether there was a formal appraisal or not at the pre-IPO transaction date, there was an implied  marketable minority/financial control (base) value for that entity at that date.  In the figure above, that is $10.00 per share on the left side.  This $10.00 per share value was likely unobserved unless the transaction was based on an appraisal. But it was there.
• The $6.50 per share pre-IPO price represented a 35% discount to the base price of $10.00 per share.  Whether the base price was $9.00 per share or $11.00 per share or some other price is irrelevant to this analysis.  The transaction almost certainly represented a discount to the marketable minority/financial control value at the time.  If it were not so, the pre-IPO transaction would likely not have occurred.  The purpose of many pre-IPO transactions is to enable insiders to acquire as much stock as possible at the lowest possible prices.
• Six months later, there was an IPO at $13.00 per share, as reflected on the right side of the figure.  We observed the pre-IPO price of $6.50 per share and now see the IPO price of $13.00 per share.
• The implied pre-IPO discount is 50% (1 – $6.50/$13.00).  However, the pre-IPO studies can make no comment about the implied 30% “IPO pick-up” in pricing that often occurs with IPOs, and which did occur in the example.
• The observed pre-IPO discount of 50% is actually a combination of the relief of the unobserved 35% marketability discount in the pre-IPO transaction and the unobserved 30% IPO pick-up.

A direct result of this analysis is that pre-IPO discounts are not “marketability discounts” at all.  They reflect a combination of factors as we have just concluded.  Pre-IPO discounts, therefore, do not provide “evidence” of marketability discounts at all.

There are more moving parts that the figure above does not take into consideration, some or all of which influence the difference between the pre-IPO price of $6.50 per share and the IPO price of $13.00 per share in unknown directions (see below).

The Valuation Advisors Lack of Marketability Discount Study and Valuation Ratios

The Valuation Advisors Lack of Marketability Discount Study is available at the link on the Business Valuation Resources website.  This study is introduced with the following:

Defend your discounts for lack of marketability with the most current data in the Valuation Advisors Lack of Marketability Discount Study. This robust, online database includes 18,700+ pre-IPO transactions, including 2,300+ non-U.S. deals covering 45 countries. This must-have tool enables you to reference actual DLOMs for companies with similar characteristics to your subject company and ensures you have the most convincing data available. (emphasis added)

The suggestion is that the Valuation Advisors Lack of Marketability Discount Study can be used, in effect, to conduct a form of the Guideline Public Company Method as defined in the ASA Business Valuation Standards in “Statement on Business Valuation Standards (SBVS) – 1.”  According to SBVS-1, valuation ratios from comparable public companies can be used, with appropriate adjustments, to apply to earnings or other metrics of a subject company in order to estimate the value of the subject entity.  I wrote about this issue at length in a prior blog post: RSD -4: Restricted Stock Discounts are Not Valuation Ratios, a part of a series I wrote examining restricted stock discounts and studies (available at this link).

The same analysis is applicable to pre-IPO discounts, which also are not valuation ratios.

SVBS-1 states the following:

V. Valuation ratios derived from guideline public companies (italics added with my comments in brackets [])

A. Comparisons are made through the use of valuation ratios. The computation and use of such ratios should provide meaningful insight about the value of the subject company, considering all relevant factors. Accordingly, care should be exercised with respect to issues such as:

1. The selection of the underlying data used to compute the valuation ratios [all that is available are the pre-IPO discounts, which are not valuation ratios at all]
2. The selection of the time periods and/or the averaging methods used for the underlying data [the data in the Valuation Advisors Study dates back to 1985-1986 timeframe (almost 40 years ago).  As with restricted stock data bases, much of the data is quite old and simply not relevant to valuations today]
3. The computation of the valuation ratios, which may be derived by relating prices of the guideline public companies to the appropriate underlying financial, operating, or physical data of the respective guideline companies [It should be clear that no valuation ratio can be calculated using a pre-IPO discount]
4. The timing of the price data used in the valuation ratios (in relationship to the effective date of the appraisal) [dated, as indicated just above]
5. How the valuation ratios were selected and applied to the subject’s underlying data

The International Valuation Glossary – Business Valuation defines a valuation ratio by defining Multiples:

Multiple — a ratio calculated as the value of a business or security divided by Economic Income or a non-financial metric. Also known as market multiple, pricing multiple, or valuation ratio. (bold in original, italics added)

The following figure replicates Exhibit 6-3 of IT3 (p. 182) and provides common examples of valuation ratios.

Pre-IPO discounts (and restricted stock discounts) measure the difference between two prices only.  These discounts do not relate the value of a public company divided by economic income or financial metrics as indicated in the definition of Multiple above and as illustrated in the figure above.  Take one pre-IPO discount.  Take the average of several or many pre-IPO discounts, regardless of how “comparable” the individual entities may be to a private subject company.  My conclusion is the same.

Pre-IPO discounts are not valuation ratios, and cannot be derived from public companies and applied to subject companies.  

Value is a Function of Expected Cash Flow, Growth and Risk

We know that the value of a business is a function of its expected cash flows, their expected growth, and the risks associated with achieving the cash flows.  In other words, the value of a business is a function of three important factors, expected cash flow, risk and growth.

The value of an interest in a business is a function of the expected cash flows to the interest (which are derivative of the expected cash flows of the business itself, the growth of those cash flows, including a terminal value at the end of an expected holding period, and the risks associated with achieving those cash flows.  In other words, the value of an interest in a business is a function of three important factors, expected cash flow, risk and growth.

The Valuation Advisors Lack of Marketability Discount Study provides limited information on the companies that went public.  That information includes (per the link from the Business Valuation Resources website):

• Industry or business description
• Revenues
• Operating income
• Operating profit margin
• Assets
• Date of transaction or IPO
• NAICS or SIC code

The data also includes the calculated pre-IPO discount for each transaction.  We query the data base for IPO companies in the same SIC Code as a subject private company that an appraiser is valuing as of a current date.

Valuing an Illiquid Minority Interest of a Private Company

The following figure illustrates available information regarding the averages of the assumed guideline company group from the Valuation Advisors Study.  The data shown are not from an actual run of the data base but are shown for analysis and perspective.  Also included are additional data points for reference and information about the subject private company.

The question that must be addressed is: How will information about companies that went public and had prior pre-IPO transactions (information on the left side above) assist the valuation analyst in developing a marketability discount for a private company (information on the right above) being valued in March, 2024 (or any current date)?  Assume that all of the IPO companies are in the same SIC Code as the subject company, and, like the subject company, they were all profitable, so they are “comparable” to an extent.

The average pre-IPO discount for the sample of 50 transactions in the figure above is 38%.  The range is from a low (premium) of (5%) to a high of 53%.

The appraiser has developed information about the subject company and the subject 15% interest.  The private company is profitable and has a 15% operating margin.  The WACC for the subject company is 12.5%, with an equity discount rate of 15% (not shown).  The private company is expected to pay a dividend that will yield 6.5% based on the marketable minority value of $18 million.  Based on her analysis, the appraiser concludes that the dividend can be expected to grow at about 5% per year over an expected 8 to 10 year holding period.

There is no information at all on the left side of the figure above that informs the appraiser about the value of the 15% subject interest.  For that to be true, the left side would have to provide insight into expected cash flows and their growth, and none is available.  It could also inform the appraiser about the risk associated with the subject 15% interest over the holding period, and none is available.

Assume that the appraiser concludes that the appropriate marketability discount should be 38%, or the average pre-IPO discount above.  That would value the company at the nonmarketable minority level at $11.2 million ($18.0 x (1 – 38%).  Given the expected dividend yield of 6.5% (based on the $18 million marketable minority value (or $1.17 million per year for the private company), the implied yield would be 10.4% ($1.17 / $11.2).  Is that reasonable?  There is no information on the left side of the figure to address the question.

Now assume that, based on a change of expectations, the appraiser believes that the expected holding period for the interest should be 3 to 5 years.  What is she to do?  Nothing changes on the left side of the figure and the facts have changed on the right side.  What should the marketability discount be?

Other Issues with Pre-IPO Studies/Discounts

There are a many moving parts to pre-IPO transactions and the pre-IPO discount in addition to the factors already discussed.   These factors include the following:

• The passage of time between the pre-IPO transaction and the IPO itself
• The further passage of time, perhaps years, between the pre-IPO transaction and the current valuation date for any appraisal
• Expected cash flow enhancements (at the very least, from earnings on cash raised in the IPO)
• Expected risk reductions as result of the new capital
• Higher growth expectations than before the IPO given the new capital raised
• Issuance of new shares in pre-IPO stock splits
• Sale of new shares to raise new capital for the company and resulting dilution for existing shareholders
• Ongoing access to the public markets

As with companies engaging in historical restricted stock transactions, relatively few companies that engage in IPOs were paying dividends or distributions.  Many companies that appraisers are called upon to value do provide such shareholder-level cash flows.

I wrote about these differences in Quantifying Marketability Discounts, which was published in 1997 (and no longer in print), concluding at that time that pre-IPO studies could not be used to help assess marketability discounts.  We reached the same conclusion in all three editions of Business Valuation: An Integrated Theory (2004, 2007, 2021).

These above characteristics are particular to each IPO candidate, and have nothing to do with the corresponding characteristics of any illiquid minority interest in any private company that appraisers might be valuing today.  In other words, they cannot inform appraisers about the impact on value of the critical factors of expected cash flow, risk and growth that define the value of illiquid minority interests of private companies at the present time.

Valuation analysts cannot reasonably expect to hold all these factors equal or account for them in a manner that enables the pre-IPO discount studies to offer valid evidence for the development of marketability discounts for illiquid minority interests in private businesses.

Conclusion

To restate the conclusion from the beginning: Pre-IPO discounts/studies cannot be used to estimate DLOMs in any credible, standards-compliant manner.

As always, comments, criticisms, or insights are welcome.

Chris

My current series of blog posts is titled “Mercer’s Musings.”  In the first three “musings,” I addressed USPAP and the Internal Revenue Service and concluded that the answer to the question of whether to comply with USPAP is “Why not?”  And the answer holds regardless of any certifications appraisers might hold.

The second and third musings address the issue of marketability discounts and conclude that it is not possible to comply with any valuation standards, whether USPAP or not, using only averages of restricted stock studies as a basis for “guessing” marketability discounts.  The third musing illustrates the depth of analysis necessary to reasonably address the complexities and nuances in valuing illiquid minority interests of private companies.  The first three musings are linked here for ease of reference.

• Mercer’s Musings #1: USPAP and the Internal Revenue Service
• Mercer’s Musings #2: Using Restricted Stock Studies to Support Marketability Discounts
• Mercer’s Musings #3: Marketability Discounts re Two Hypothetical Minority Interests

This fourth musing examines the guidance found in “Procedural Guideline -2 (PG – 2) Valuation of Partial Ownership Interests” in the ASA Business Valuation Standards.  Procedural Guidelines (PG) are designed to provide more detailed guidance for consideration by business appraisers than found in the base standards themselves.  Procedural Guidelines are not binding, but they are instructive of the degree of analysis that might be considered.

PG – 2 Valuation of Partial Ownership Interests

Mercer’s Musings #4 will now address a portion of PG-2: Valuation of Partial Ownership Interests.  The first section of PG-2 is its “Preamble,” which provides an overview of the intent of the guideline.  The second section is called “General Principles,” where readers find a discussion of the concept of partial ownership interests, the wide range of possibilities that are raised when such interests, and guidance regarding the differences between valuing businesses versus interests in them.

This post addresses the lengthy third section of PG-2, which is called “Factors to consider.”  The hypothetical valuation presented in Mercer’s Musings #2 and “solved” in Mercer’s Musings #3 considered a significant number of factors in developing marketability discounts for two dissimilar, 10% interests in two identical companies.  We now turn to PG-2 to provide an outline of the wide range of considerations that should be in appraisers’ minds with they begin to value partial ownership interests.

We begin with a quote from the beginning of Section III.  My comments are provided in red.

III. Factors to consider

A number of factors may be appropriate to consider in valuing partial ownership interests. The
following list is not intended to be all-inclusive. Items on the list may or may not be applicable in
specific valuation situations.

A. The purpose and definition of the valuation engagement in accordance with BVS–I General
Requirements for Developing a Business Valuation, including the applicable standard (type) and
premise of value.

B. Factors related to the underlying enterprise or asset, including:

1. The value of the underlying enterprise or asset, if applicable.
2. Enterprise-level or asset-level tax effects, if relevant.

Every appraisal must have a stated purpose and definition of the valuation (i.e., the standard of value).  The beginning point of the valuation of a partial ownership interest is almost always the value of the underlying business or asset.  This is the “base value” that has been addressed in a number of posts on this blog.  The guideline also suggests that enterprise- or asset-level tax effects might need to be considered.

C. Factors related to the subject partial interest, including:

1. Provisions in the organizational and governance documents that affect the rights,
restrictions, marketability and liquidity of the subject interest. Documents to consider may
include partnership agreements, articles of incorporation, bylaws, operating agreements,
buy-sell agreements, investment letter stock restrictions, option agreements, lock-up
requirements or others that may be relevant.

Analogous to Standards Rule 9(4), of the Uniform Standards of Professional Appraisal Practice, appraisers are instructed to examine the underlying corporate documents that might increase or decrease the risks of holding minority interests in businesses. 

C2. Applicable laws and regulations. Business examples include statutory rights to demand
dissolution of a corporation under state law, restrictions on transfer pursuant to SEC Rule
144, and many others. An asset example is included the right to partition.

C3. The existing ownership structure and configuration.

C4. Access to, availability of, and reliability of information regarding the underlying asset or
entity.

C5. The relevant pool of potential buyers, if any.

C6. Market data on transactions in similar markets, if any. Potentially similar markets might
include private placements in publicly or privately syndicated entities (including restricted
stock transactions, pre-IPO transactions, and transactions in publicly traded limited
partnerships) or tenants-in-common arrangements, etc.

Paragraphs C2 through C6 should be familiar to most business appraisers.  We must take applicable laws and regulations into account.  It is fairly standard to consider the ownership structure and configuration and influence that management might have on the value of illiquid minority interests.  The question is: How can appraisers do that?  Purely qualitative analysis seems to fall short. 

Access to reliable information is certainly an important factor since investors desire to know the factual backgrounds of their investments.

The relevant pool of hypothetical buyers is also important.  For example, if an interest has a value of $100 thousand, there may be a considerable number of potential investors.  If the interest has a value of $10 million, the pool of buyers would likely be both limited and sophisticated.  These are important considerations.

And certainly, it is important to examine relevant transactions in interests similar to a subject interest or in the interest itself.  Valuation inferences can sometimes be made from knowledge of past transactions. 

Paragraph C7 (below) focuses on the expected holding period for an investment.  This is analogous to the guidance in Standards Rule 9-4(d) of USPAP, which requires examination of holding period and interim benefits. Note, however, that many factors may influence the expected holding period. This is true because the expected holding period can seldom be estimated with certainty.  As a result, Paragraph C7.k suggests that appraisers might need to consider a relevant range of expected holding periods.

C7. Expected holding period for an investment in the subject interest, including consideration of
such factors as:

a. The extent to which the expected holding period may be uncertain.

b. Defined expiration or termination dates contained in the governing documents, or
other external factors, that may precipitate a foreseeable liquidation or sale of the
underlying entity.

c. Analysis of the age, health and other characteristics of the other owners and/or key
managers, which could provide information about the possible timing of a sale or
liquidation by the controlling owner(s).

d. The history of transactions (if any) involving partial (or possibly controlling)
interests of the subject enterprise or asset, including recapitalizations or stock
repurchases that have provided liquidity to shareholders.

e. The potential market for similar enterprises or assets (e.g., is the industry
consolidating?).

f. The emerging attractiveness of the entity for equity offering, sale, merger or
acquisition.

g. Provisions in the governing documents or buy-sell agreements, or under law or
regulation either prohibiting, restricting or allowing transfer of the subject interest.

h. Rights and powers attributable to the subject interest that may enable a sale of the
subject entity, asset or the interest itself, against the will of the other owners.

i. Historical actions of management and/or the directorate, which may provide
information about their policy and intentions regarding eventual sale of the entity or
asset, or receptivity to a potential sale or repurchase of partial interests.

j. The existence, depth and functioning of markets that might be available for interests
similar to the subject interest.

k. The appropriateness of considering a range of expected holding periods and exit
possibilities.

As suggested above, the expected holding period for an investment in a partial ownership interest can seldom be known with certainty.  Therefore, it is important for appraisers to examine the factors that might influence the length and uncertainty of the holding period.  There are a number of such factors.  For example, the governing documents of a partnership may provide for a specific termination date.  A controlling shareholder may be older and in poor health, which could trigger a potential sale of the business within a foreseeable period.

Most private companies that have been around for many years have histories of shareholder buy-outs, share repurchases, or other transactions in their shares (or interests).  If there is significant potential for future transactions, the expected holding period might be relatively shorter; and, if not, relatively longer.

It is not necessary to comment on every item in the list above with potential impacts on the expected holding period.  However, it is necessary for business appraisers to consider these factors.  In the final analysis, the length (or range) of expected holding periods may have a significant impact on the value of particular interests.  Think in terms of the time value of money as we look at the next factor to consider in valuing illiquid minority interests, that of expected economic benefits.  Know also that whether an appraiser makes a specific assumption regarding the expected holding period of an investment, there is an implicit assumption (or range of assumptions) implied by his or her conclusion.

C8. Expected economic benefits associated with the subject interest, which come from interim benefits (dividends or distributions) and a terminal cash flow when the investment is sold or liquidated.

a. Expected interim dividends or distributions to the interest, which may differ from
the expected benefits (cash flows) generated by the entity or asset as a whole.
Interest-level benefits may be affected by such factors as:

(1) The history of dividends or distributions, including both timing and amounts.

(2) Current or expected future distribution policy.

(3) Preferential dividend claims.

(4) Enterprise-level and/or interest-level tax characteristics.

(5) The outlook for one-time and/or irregular dividends or distributions.

(6) Circumstances with controlling owners that may increase (or decrease) the likelihood of future interim benefits.

Simply put, the expectation of dividends or distributions from investments in partial ownership interests is important to investors, whether hypothetical in the context of fair market value determinations, or real investors who put real money at risk.  The impact of expected distributions on present value cannot be estimated qualitatively.  The determination of the present value of expected future cash flows is inherently a quantitative exercise.

The final cash flow for minority interests is the expectation of a terminal value at the end of the expected holding period.

b. The expected terminal cash flow at the end of the expected holding period(s), which may be a function of such factors as:

(1) Possible future transactions involving the enterprise or asset as a whole, or
transactions in the subject interest itself.

(2) Current (valuation date) value and expected growth in value of the enterprise or
asset to the end of the expected holding period(s).

(3) Growth in value may be a function of expected earnings retention (distribution
policy) and the amount of and effectiveness of expected reinvestment in the
entity or asset.

If there is no expectation of future dividends, the only future cash flow is the expected terminal value.  Interim cash flows reduce risk, as seen in the hypothetical valuations in Mercer’s Musings #3.  To estimate the terminal value, it is necessary to have the current value of a business at the marketable minority/financial control level of value.  From that base, the analyst must estimate the expected future growth in value of the business over the expected holding period based on its expected business plan.  The terminal value is then estimated at the end of the expected holding period (or over a range of expected holding periods).

Paragraph 8 above, with its sub-paragraphs a. and b., provides guidance on how to examine the history of dividends or distributions, or one-time (special) dividends as a means of developing expectations for future distributions.  Once again, examining the history of owner/management needs for cash from a business can influence the outlook for future cash flows for all owners.  Certainly, preferential dividend claims can also enhance the certainty of future cash flows to illiquid interests.

The next section examines the required holding period return, or the discount rate necessary to reflect the risks associated with achieving the expected cash flows from a minority interest.

C9. Required return for investing in the subject interest. The required return may consider risks
other than risks related to the enterprise or asset as a whole, including, for example:

a. The expected length and uncertainty of the holding period.

b. The likelihood of dividends or distributions (i.e., expected distribution policy).

c. The costs of due diligence efforts required to acquire the subject partial interest.

d. The costs of monitoring the investment over the expected holding period, including
issues related to the expected receipt of timely and reliable information concerning
the investment.

e. Required returns on similar investments or investments with similar investment-specific liquidity and holding period characteristics.

f. The risk of tax liabilities from pass-through profits without guaranteed tax
distributions in entities such as limited liability companies, Subchapter S
corporations or partnerships.

g. The difficulty and cost of marketing the subject interest.

h. The risk of involuntary dilution when no preemptive rights are provided in the
articles of incorporation or bylaws of a corporation.

i. The degree of control conveyed by the subject interest.

The required holding period return is the sum of the base equity discount rate of the subject business plus an aggregate holding period premium that is estimated by appraisers.  This holding period premium is the same holding period premium demanded by investors in restricted stocks.  Keep in mind that with a restricted stock transaction, the only reason for a discount is that investors demand a “holding period premium,” or higher discount rate than for the underlying public security.  This should be clear because the expected cash flows and growth are precisely the same.  Since risk is greater, restricted share prices are lower than the public price, therefore yielding restricted stock discounts.

Appraisers sometimes think that it is not possible to estimate holding period premiums.  However, the same appraisers estimate company-specific risk premiums on a regular basis.  We do so in the context of alternative returns for similar investments.  The same is true for holding period premiums in the valuation of illiquid minority interests of private companies.

C10. Ownership-level tax effects, if relevant.
C11. Prior transactions in the subject interest, entity or asset, and their relevance to a given
assignment.

Appraisers can examine the impact of ownership-level taxes as well as prior transactions in the subject interest.

D. Interaction of the factors listed above, and their cumulative impact on the degree of control,
marketability and liquidity of the subject interest.

Paragraph D is a catchall reminding appraisers that the various factors noted above may interact with each other. 

Conclusion

There is a great deal more to valuing illiquid minority interests than “guessing” at a marketability discount based on vague references to dated and non-comparable restricted stock transactions or studies.

All appraisers would be well-served to read PG – 2 Valuation of Partial Ownership Interests in the ASA Business Valuation Standards.  Doing so should provide a different and more realistic view of the valuation of illiquid minority interests of private companies than is held by many appraisers.

Chris

In Mercer’s Musings #2, we discussed the old and cold data on restricted stock transactions that have been misused by appraisers for decades.  My conclusion is that the various restricted stock studies are inadequate to meet current business valuation standards and that they should not be used as a basis for “guessing” the magnitude of marketability discounts for illiquid interests of closely held businesses.  This conclusion applies to all appraisals, including those prepared for the Internal Revenue Service.

Some readers of this blog will want to disagree and say that the use of restricted stock studies to develop DLOMs is an “accepted” methodology for IRS-related appraisals.  Whether “accepted” or not, the qualitative use of averages of studies is inadequate to develop reasonable conclusions regarding marketability discounts given the wide variety of valuation situations facing business appraisers.  It seems that many business appraisers simply want to keep their heads in the sand and avoid changing at almost any cost.

Basic Valuation Review

The Value of a Business

The value of a business is the present value of all expected cash flows from the business (into perpetuity) discounted to the present at a discount rate reflective of the risks associated with achieving those cash flows.  In other words, value is a function of expected cash flow, growth, and risk.

Every appraisal of every business entails an examination of expected cash flows (using income capitalization methods, discounted cash flow methods, guideline public company methods, or guideline transaction methods).  Appraisals also consider growth (long-term growth rates or finite period growth rates in a DCF method and then a long-term terminal growth rate).  In guideline public company or guideline transaction methods, expected growth may be implied in the selected multiples or considered specifically by business appraisers. And appraisers develop discount rates that reflect the risks associated with achieving expected cash flows (or multiples from markets that have risk embedded in them).

Business appraisers cannot value businesses without explicit (or implicit depending on valuation methodology) consideration of their expected cash flows, the growth of those cash flows, and the risks associated with achieving the cash flows of the businesses being valued.

The Value of an Interest in a Business

The value of an interest in a business is similarly defined by the expected cash flow to the interest, the expected growth in value of the interest over the expected holding period, and the expected terminal value of the interest at the end of the expected holding period.  That terminal value is normally assumed to be the expected value of the business at the marketable minority/financial control level at the end of the expected holding period of the interest.  These expected cash flows to the interest are then discounted to the present (or to the valuation date) at a discount rate reflective of the risks associated with achieving the expected cash flows to the interest.  This definition of the value of an interest in a business parallels the definition of the value of a business noted above.

The discount rate of the business of which a subject minority interest is a portion is the base level of risk for the subject interest of the business.  Hypothetical buyers of interests of businesses recognize that there are additional risks, above the risk of the business, to the prospective buyer of such an interest.  That incremental risk can be described as a holding period premium, which is necessary to appropriately reflect the risks associated with achieving the expected cash flows to the interest.  The sum of the discount rate of the business and the holding period premium can be called the required holding period return appropriate for the interest.

Why would any business appraiser who knows that valuation is a function of expected cash flows, growth, and the risks associated with achieving them not think about the hypothetical in quantitative terms?  However, when business appraisers use averages of restricted stock studies to attempt to “guess” at marketability discounts, they are basing their conclusions on a very weak form of qualitative analysis.

Valuation Premiums and Discounts

Recall from Mercer’s Musings #2, we quoted the ASA Business Valuation Standards regarding premiums and discounts.  The quote is from “BVS VII, Valuation Premiums and Discounts.”:

II. The concepts of discounts and premiums

C. A discount or premium is warranted when characteristics affecting the value of the subject
interest differ sufficiently from those inherent in the base value to which the discount or premium
is applied.

D. A discount or premium quantifies an adjustment to account for differences in characteristics
affecting the value of the subject interest relative to the base value to which it is compared.  (bold in original, italics added)

Paragraph II.C states, paraphrasing, that discounts and premiums quantify adjustments to account for differences in characteristics affecting the value of the subject interest.

Recall the figure in Mercer’s Musings #2 that showed averages, medians, a few standard deviations, and ranges of discounts in various studies of restricted stock discounts.

Nothing in this figure addresses the expected cash flows of minority interests in any businesses, their expected growth, or the risks associated with achieving those cash flows.  Therefore, nothing in this figure can enlighten business appraisers about the appropriate marketability discounts for minority interests in any business.  It really is that simple, in spite of the desire of many appraisers to keep doing things the old way.

Restating the Hypothetical

The hypothetical posed in Mercer’s Musings #2 calls for the valuation of 10% interests in two identical corporations at the marketable minority/financial control level of value.  The hypothetical is repeated below.

As seen in Lines 1 to 6, Company A and Company B are alike in all respects leading to identical valuations of $10 million each at the marketable minority/financial control level of value.  The hypothetical then describes two 10% minority interests that have the same pro rata value of $1 million at that same level (Lines 7 and 8).  The interests differ significantly from that point on.  The interest in Company A has a high dividend yield and slow expected growth (Lines 9 to 13).

The interest in Company B has a much lower dividend yield and much higher expected growth.  Note that the combined dividend yield (3%) and expected growth (9%) total 12%, or less than the discount rate for Company B of 13%.  This suggests that there are sufficient agency costs (like excess owner compensation) that reduce the overall base expected return by 1% for the interest in Company B relative to the interest in Company A (13%).

The hypothetical calls for estimates of marketability discounts for each of the interests for five-year expected holding periods and ten-year expected holding periods.  The beginning point for the required holding period returns is the 13% discount rate for each of Company A and Company B.  The hypothetical provides a required holding period return of 18% for the interest in Company A, representing a 5% holding period premium to the base discount rate.  The given required holding period return for the interest in Company B is 19.5%.  It should be intuitively obvious why the required return for Company B exceeds that of Company A.

The expected cash flow stream for the interest in Company A is more favorable to investors than the cash flow stream for the interest in Company B, so an additional holding period premium to the base discount rate of 13% is needed.  This is clear in the following figure, which provides the expected cash flows for the interests in Company A and Company B based on the assumptions in the hypothetical.  For simplicity, we show only the first five years of the total forecast period of ten years.

We can observe the following about the expected cash flow streams of the interests in Company A and Company B.

• Looking at the far right of the figure, the interest in Company A delivers cash flow more rapidly (32% is expected over the holding period and 68% in the terminal value) than the interest in Company B (only 11% over the expected holding period and 89% in the terminal value.  The hypothetical recognized this fact and called for a higher required holding period return for Company B (19.5%) than Company A (18%).  Interestingly, Company B delivers slightly more total cash flow ($1.734 million) than Company A ($1.706 million), but the timing of expected receipt is delayed, therefore increasing the riskiness of the interest in Company B.  These differences will define a portion of the differences in the values of the interests.
• The interest in Company A is expected to have quarterly distributions, so the mid-year discounting convention is used in estimating its value.
• The interest in Company B is expected to receive dividends at the end of each year, so the end-of-year convention is used.  The differences in discounting conventions will also impact the relative values of the interests in Company A and Company B.

We can pull it all together now with a few more calculations.  The figure will show only five years of projected cash flows, but the conclusions for the ten-year expected holding periods will also be shown for further perspective.

The figure shows all key assumptions of the valuations of the 10% interests in Company A and Company B.  We observe the following regarding Company A’s interest at the top portion of the figure.

• The expected distributions and terminal value are calculated on Lines 1 thru 3, repeating the projections of the figure above.
• Present value factors are calculated based on the assumed required holding period return of 18% and the mid-year discounting convention.
• The present value of all expected cash flows for the 10% interest in Company A for a five-year expected holding period is $925,055, which represents an implied marketability discount of about 7.5% (i.e., 1 – $925,055/$1,000,000).
• The implied marketability discount for the ten-year expected holding period is $839,978, which represents an implied marketability discount of 16.0%.

These discounts, some will say, are very low.  The reason for the relatively modest discounts is that the investment in the interest in Company A represents an attractive investment.  In the context of a fair market value determination, the hypothetical negotiations of hypothetical willing buyers and sellers would recognize the “characteristics of the investment” and reflect them in its pricing.

Now we look at calculations for the 10% interest in Company B at the bottom of the figure.

• The expected cash flows are repeated from above on Lines 11 to 13.
• Present value factors are calculated based on a 19.5% required holding period return and the end-of-year discounting convention, with the present values of expected cash flows calculated on Lines 16 and 17.
• The present value of all expected cash flows for the 10% interest in Company B for the five-year expected holding period is $748,817, which represents an implied marketability discount of 25.4%.
• The present value of all expected cash flows for the ten-year expected holding period is $588,560, which represents an implied marketability discount of 41.4%.

These discounts happen to fall within the broad range of 25% to 45% from the restricted stock studies summarized above.

The discounts for the 10% interest in Company A do not fall within this range.  What should we think about that?  Well, the range of restricted stock discounts in the summary figure above is from a minus 30% (that’s a premium or a negative discount) to a high discount of 91%.  The estimates of marketability discounts for Company A’s interest certainly fall within that broad range.  However, that fact provides no support for any concluded marketability discount.

Concluding Observations

We have just conducted two shareholder-level discounted cash flow analyses to estimate marketability discounts for two dissimilar minority interest investments.  It should be clear at this point that the hypothetical cannot be solved by using the “old and cold” averages of restricted stock studies.

Mercer’s Musings #4 will address the concept of valuation premiums and discounts in the context of the levels of value, which, according to some, is not a settled issue.  We will see.

In the meantime, be well, and, of course, please do comment either on the blog or on the post when it is placed on LinkedIn.

Chris

Mercer’s Musings #1 addressed the topic of compliance with USPAP and the Internal Revenue Service.

This second musing addresses the use of restricted stock studies to support marketability discounts in gift and estate tax appraisals prepared for the Internal Revenue Service (or for anyone, for that matter).  This musing is addressed to all appraisers, regardless of which valuation credential(s) they hold.  Chapter 8 of Business Valuation: An Integrated Theory Third Edition (by Mercer and Harms) (“Integrated Theory 3”) contains a detailed discussion regarding restricted stock transactions.  I’ll try to be brief but effective in this musing.

Restricted Stock Transactions

Figure 8.1 from Integrated Theory 3 defines and illustrates a Restricted Stock Discount (RSD) for a hypothetical public company issuing restricted shares in a private offering.

The exhibit is fairly basic and illustrates a single, hypothetical restricted stock transaction involving a publicly traded company that issued restricted stock on a given date.  What do we know based on this restricted stock transaction?

• The restricted stock transaction occurred at $15.00 per share.
• PubliCo’s unrestricted shares sold at $20.00 per share at the time of the transaction.
• The restricted stock transaction occurred at a price that was $5.00 per share lower than the freely trading shares ($20.00 – $15.00).
• The restricted stock transaction was 25% lower than the price of PubliCo’s otherwise identical but freely trading shares.
• PubliCo’s unrestricted shares closed at a price $5.00 per share higher than the restricted stock transaction price.
• PubliCo’s unrestricted shares closed at a 33.3% premium to the restricted stock transaction price.

These facts are all we know about this restricted stock transaction.  There is absolutely no economic information in this or any restricted stock transaction.  An RSD simply measures the difference between two prices.  RSDs are not value drivers like EBITDA, gross profit, number of cases, or any other value drivers.

If there is no economic information in a single restricted stock transaction, how much economic information is there in an average of 30, 50, 400 restricted stock discounts in the tired and old restricted stock studies?  The answer, of course, is none.

Restricted Stock Studies

There are perhaps 20 or more restricted stock studies of one kind or another.  Sixteen of the most prominent studies are summarized in the following figure, which is based on Exhibit 8.15 of Integrated Theory 3.

The figure highlights six studies at the top.  Note the range of averages and medians.  These studies, based on restricted stock transactions occurring up through 1982, or more than forty years ago, were the basis for what I call a long-lasting “appraisers’ folly” regarding restricted stock discounts.  These six studies and their bare statistics created the myth that restricted stock discounts “tended” to be in the broad range of 25% to 45% and in the narrower range of 35% to 45%. And more than a few appraisers use these stale and tired studies to guess at marketability discounts in 2024.  Nevertheless, most appraisers have never read the studies, which are referenced in Exhibit 8.15 of Integrated Theory 3.

The total number of restricted stock transactions noted in the figure above is 1,647, not accounting for transactions that were examined in multiple studies.  About 80% of all transactions in the studies occurred between 1966 and 2006, or going on twenty years ago.  Only about 275 transactions have been examined since 2006.  Both the studies and the transactions are “old and cold.”  The pricing and discounts of these ancient studies have nothing to do with private company valuation in 2024.

Restricted stock analysis is a very weak form of guideline public company analysis.  What would you (or a court) say if I created a guideline public company group for a valuation as of December 31, 2023, consisting of companies that existed twenty years ago, and based my analysis on multiples calculated as of December 31, 2003?  Even assuming almost perfect “comparability” of the group with my subject company, you would call me crazy — or worse.  The pricing and multiples from 2003 have no bearing on the value of my private company in 2023.

It has been argued that restricted stock discount analysis is a method “accepted” by the IRS and the Tax Court that has been used for years.  Whether such analysis is “accepted” or not, the old data has no relevance for valuations occurring at the present.  If you disagree with this rather strong statement, feel free to comment on this blog with your rationale for such relevance.

If there is no economic evidence in one restricted stock transaction, there is none in the 1,647 transactions summarized in the figure above.

A Hypothetical Valuation Situation

Let’s assume that all the restricted stock information available to an appraiser (or you) is contained in the figure above.  If you have more evidence not included above, feel free to use it.  Now assume the following example to determine marketability discounts for 10% interests in two companies that are identical except as noted in the figure below.  The valuation date is January 31, 2024.

Looking at the valuation characteristics of the Companies:

• Company A and Company B have identical discount rates and long-term growth rates (and cap rates and price/earnings multiples).
• They also have identical net (after-tax) earnings and, therefore, values at the marketable minority/financial control (MM/FC) level of value (Lines 1 to 6 above).

The hypothetical calls for the determination of appropriate marketability discounts for two 10% interests, one in Company A and the other in Company B.  Looking at the valuation characteristics of the two interests, we note:

• They have identical values at the MM/FC level of value (Lines 7 and 8 above).
• Company A’s annual dividend for the 10% interest is $100,000, which provides a 10% expected dividend yield based on the MM/FC value of the interest.  The dividend will be paid quarterly, so the mid-year discounting convention is assumed.
• Company B’s annual dividend for the 10% interest is $30,000, which provides a 3% expected dividend yield.  This dividend is paid at the end of each year, so the end-of-year discounting convention is assumed (see these assumptions on Line 11).
• The expected growth in value of Company A over the expected holding periods is 3% (Line 12), which is identical to the long-term expected growth in value for Company A (Line 2) [Line 1 (13%) minus Line 10 (10%), or (3%)], The expected growth in the dividend is 3%, or the same as the expected growth in value of Company A (Lines 12 and 13).
• The expected growth in value for Company B over the expected holding periods is 9% (Line 13).  Given that the discount rate for Company B is 13% (Line 1) and that the expected dividend growth and growth in value for Company B is 9% (Lines 12 and 13),  we can assume that there are sufficient agency costs (e.g., excess owner compensation) to lower the overall base return for the interest from 13% (the discount rate for Company A is 13%) to 12% (for Company B).
• Now assume that we desire to estimate marketability discounts for the two 10% interests assuming expected holding periods of five and ten years for each interest (Line 14).  Liquidity will occur at the end of each of the expected holding periods at the MM/FC level.
• The hypothetical assumes that the appropriate required holding period return (i.e., the discount rate for the holding period) is 18% for the interest in Company A.  That represents a 5% premium to the discount rate for Company A itself.  This is because holding a 10% interest in business entails more risk than Company A itself.  Assume for purposes of the hypothetical that this 5% “holding period premium” is reasonable and supported by market evidence (including from the restricted stock studies above).
• The assumed required holding period return for the interest in Company B is 19.5%, or 1.5% greater than the comparable interest in Company A. The investment in the 10% interest in Company B is a riskier investment than the comparable interest in Company A.  The annual dividend is much lower and, although expected growth is greater, the return on expected growth in value is deferred, leaving the greatest portion of return to the end of the expected holding period.  Think time value of money.

While Companies A and B are identical as noted above, the 10% interests in them represent two distinctly different investments.  The interest in Company A is a high cash flow and slow growth investment.  The interest in Company B is a more rapidly growing investment with a much smaller dividend yield (and modest agency costs).

Recall the guidance from USPAP Standards Rule  9-4(d) noted in Mercer Musing #1.

(d) An appraiser must, when necessary for credible assignment results, analyze the effect on value, if any, of the extent to which the interest appraised contains elements of ownership control and is marketable and/or liquid.

Comment. An appraiser must analyze factors such as holding period, interim benefits, and the difficulty and cost of marketing the subject interest…

If any reader is able to articulate cogent reasons for the marketability discounts applicable to the 10% interests in Companies A and B for five and ten-year expected holding periods using only the information in the studies above, I will personally donate $1,000 to St. Jude Children’s Research Hospital in his or her honor.  Given the facts assumed in the hypothetical, appraisers cannot “analyze the effect on value, if any,” of the differing valuation characteristics of the two 10% interests using a qualitative analysis.  The hypothetical provides two different sets of cash flows, two different risk profiles, and two separate expected holding periods.  Think about the discounted cash flow method for companies.

What Does SSVS (VS 100) Say?

It has been said that holders of the ABV and CVA designations are not required to follow USPAP.  What are they required to do?  We examine SSVS issued by the AICPA:

Statement on Standards for Valuation Services (VS Section 100) issued by the AICPA states the following about the application of discounts (Paragraphs per Standards, emphasis added):

.40

During the course of a valuation engagement, the valuation analyst should consider whether valuation adjustments (discounts or premiums) should be made to a pre-adjustment value. Examples of valuation adjustments for valuation of a business, business ownership interest, or security include a discount for lack of marketability or liquidity and a discount for lack of control. An example of a valuation adjustment for valuation of an intangible asset is obsolescence.

.63

This section should [formatting changed]

(a) identify each valuation adjustment considered and determined to be applicable, for example, discount for lack of marketability,

(b) describe the rationale for using the adjustment and the factors considered in selecting the amount or percentage used, and

(c) describe the pre-adjustment value to which the adjustment was applied (see paragraph .40).

Looking at the figure summarizing the restricted stock studies above, it would appear to be difficult or impossible to make a reasonable determination of the appropriate marketability discounts.  Following this guidance from SSVS, an appraiser could:

a. Identify the need for a marketability discount.

b. Describe a rationale for using a marketability discount.  For example, referencing a levels of value chart, the appraiser could say that the rationale for using the discount for lack of marketability is to recognize the difference in valuation characteristics between the pre-adjustment value ($10,000,000 for both companies at the marketable minority/financial control level of value) and the nonmarketable minority level of value, which is appropriate for an illiquid, minority interest of a business.  The appraiser would run into a problem, however, when trying to describe the “factors considered in selecting the amount or percentage used.”  There is no ability to do this from the data provided.

c.  As noted in b., describe the pre-adjustment value.

There is simply no information in the restricted stock studies (summary statistics or information on companies paying dividends) to enable an appraiser to satisfy the basic requirements of SSVS as quoted above.  Let me provide the following caveat.  I am not a CPA and do not hold the ABV designation.  Neither do I hold the CVA designation (I do hold the ABAR designation of the NACVA).  I have, however, studied and worked to develop the ASA Business Valuation Committee (as a member of the Valuation Standards Committee for nearly thirty years and as its Chair for several years) and the International Valuation Standards of the IVSC as a member of its Professional Board for a number of years.

The fact that appraisers have “guessed” at marketability discounts for decades using the filters above does not make such guessing correct or standards-compliant for the Internal Revenue Service or for any other purpose.

Determining the appropriate marketability discounts for 10% interests in Companies A and B must be, at least substantively, a quantitative exercise.  While the marketable minority/financial control values are equal and the companies have almost identical earnings and risk profiles, the subject interests have significantly different valuation characteristics and expected cash flows over the (assumed) five and ten year expected holding periods.  To the best of my knowledge and understanding, these differences cannot be realistically examined qualitatively.  Appropriate quantitative assumptions must, of course, be made; however, those assumptions must be made considering common sense, informed judgment, and reasonableness, the trilogy of considerations from RR 59-60.

ASA Business Valuation Standards

The ASA Business Valuation Standards provide fairly specific guidance on the application of premiums and discounts in “BVS-VII Valuation Premiums and Discounts.”

II. The concepts of discounts and premiums

C. A discount or premium is warranted when characteristics affecting the value of the subject
interest differ sufficiently from those inherent in the base value to which the discount or premium
is applied.

D. A discount or premium quantifies an adjustment to account for differences in characteristics
affecting the value of the subject interest relative to the base value to which it is compared.  (bold in original, italics added)

These ASA standards make clear that the reason that valuation discounts and premiums exist is to recognize the impact on value of “characteristics affecting the value of the subject interest”, which may vary between an illiquid minority interest and the equity value of the business as a whole.

An appraiser limited only to the information summarized above about restricted stock studies would, like an appraiser attempting to follow SSVS, not be able to meet the requirements of these basic standards.  At least that is my interpretation based on the quoted standards and the data limitations using restricted stock studies to determine marketability discounts.

What’s an Appraiser to Do?

Determining the appropriate marketability discounts for 10% interests in Companies A and B must be, at least substantively, a quantitative exercise.  Granted, appropriate assumptions must be made, but they must be made while remembering the trilogy of common sense, informed judgment, and reasonableness from RR 59-60.  We will address this basic quantitative derivation of marketability discounts for Companies A and B in Mercer Musings #3.  Feel free to comment, either on the blog post directly or on LinkedIn when the post is published there.

In the meantime, I hope you are well.

Chris