Valuation discounts are attractive because they allow for reductions in value that can be useful for a variety of purposes, including estate and gift planning. The discounts applicability and magnitude must be grounded in a careful analysis of the facts and circumstances of each case.
One such discount is the discount for lack of marketability (DLOM) and it is a method used to help calculate the value of closely held and restricted shares. The theory behind DLOM is that a discount exists between the value of a company’s stock that is and is not marketable. Marketability is defined as the ability to convert an investment into cash quickly at a known price and with minimal transaction costs.
As business valuation has evolved, valuators are no longer applying an average or median benchmark discount but are making an effort to drill down into empirical studies and/or employ other quantitative models. Subjective company factors range from attractiveness of subject business to attractiveness of subject industry to quality of management to financial condition to business risk.
Furthermore, there may other factors a valuator should consider in a company’s operating agreement and buy-sell agreement that could put restrictions on a sale or transfer of company interests.
Call us today at Cassady Schiller to learn more about business valuations, applicability of discounts in the valuations and how we can assist you and your company in your endeavors.