Survey: Which is the most commonly used DLOM method?
In our continuing coverage on determining the discount for lack of marketability (DLOM) (see BVWire™ #82-1), we’ve identified five methodologies that valuation practitioners most commonly use. The survey is sure to provide provocative discussion and debate at the 2nd Annual University of San Diego School of Law, Business Valuation and Tax Conference on October 9th. Register now to take advantage of the early-bird price discount, ending September 9th.
The top DLOM methodologies include:
- Restricted stock studies: Comparing the price of restricted shares in a public company versus their unrestricted counterparts; e.g., The FMV Restricted Stock Study™, Management Planning, Inc. Study, and Liquistat Database study.
- IPO studies: Comparing the price of a share before and after an Initial Public Offering (IPO); e.g., the Robert W. Baird studies, Willamette Management Associates studies, and Valuation Advisors’ Lack of Marketability Discount Study.
- Discounted cash flows models: e.g., the Quantitative Marketability Discount Model (QMDM) and the Tabak model.
- Options valuation models: Valuing the restriction on marketability using an options valuation or risk management framework (e.g., the Chaffe, Longstaff, LEAP, Finnerty, and NICE models).
In addition to these empirical methods, valuation practitioners frequently refer to Mandelbaum v. Comm’r (T.C. Memo 1995-255)(June 1995), not only for its ten factor analysis but for the Tax Court’s rather critical response to all the “charts, graphs, factual data, testimony, and expert opinion” that it faced in that case:
We are not bound by precise appraisal formulas. As the Court has previously observed, the valuation of property is an inexact science, and, if not settled by the parties, must be resolved by the judiciary by way of ‘Solomon-like’ pronouncements. [. . .] Expert testimony sometimes aids the Court in determining valuation. Other times, it does not.
Which do you most commonly use? To find a method amidst the DLOM madness, we’ve set up a quick e-survey to poll valuation practitioners. The five questions won’t take you more than five minutes to answer—and we’ll publish the responses in upcoming ‘Wire. We’ve also asked CRA International experts Arthur Rosenbloom (Senior Consultant, New York) and Bala Dharan, (Vice President, Boston), who crafted the survey, to provide further insights and an overview on the state of DLOM, including the most critical question of all: is there a sufficient financial and theoritcal basis to apply DLOM? To participate in the DLOM survey, click here.
ASA and CICBV will pursue international BV organization
In a major step forward for the BV profession, the American Society of Appraiser’s Board of Governors voted last week to allow its Business Valuation Committee (BVC) to formulate a business plan regarding a joint venture with the Canadian Institute of Chartered Business Valuators (CICBV) to expand internationally. The organizations will use education to accomplish the goal, creating new programs specifically for the valuation markets that are developing overseas in Europe, Asia, and Central/South America. The old model of using U.S. and Canadian instructors to teach North American valuation practice overseas will evolve into a model in which experienced professionals in each market will teach in their own markets.
John Barton, the new Chair of the BVC, offers the following assessment of the opportunity in the latest ASA BVE-Letter:
One criticism of the BV industry is that there is no single business valuation association in North America that has united practitioners into one voice. We have different practice standards and different educational programs for each professional society. While one unified set of BV standards has eluded us domestically, we are hopeful that this educational effort will begin an international association of business valuation practitioners who at least adhere to one comprehensive training program. How these practitioners end up being organized into professional societies remains to be seen. An umbrella concept of associated BV associations is one concept that has been proposed.
“I have submitted a Plan and have asked the Board for a formal ‘yes’ or ‘no’ vote at their September meeting,” Barton tells the ‘Wire. “I will keep you posted.”
BVR applauds this step. Both CICBV and ASA have been providing superior training for members, and this can only be enhanced by a joint effort to bring business appraisers from other countries into the effort. This is not just a North American profession, and efforts by IVSC and others have opened the door for international practices and standards.
One-time opportunity to try BP Calculator for free
On Friday, August 28th, BVR will welcome Peter Butler and Keith Pinkerton, creators of the Butler Pinkerton Calculator™ (BPC), as they conduct a special one-hour free webinar. Featuring the latest and best techniques for using this tool to objectively quantify company-specific risk premiums (CSRPs) and total costs of equity (TCOEs) for guideline publicly-traded companies, this free event is the perfect chance to see the BPC in action with its creators. Attendees will receive hands-on tutelage of the practical applications of the BPC—such as the selection of inputs and analysis of results—through live examples, case studies, and Q&A. After the one-hour presentation, attendees will be better able to support and defend their discount rate conclusions for their subject company. To register, click here.
Congratulations to Matt Crow at Mercer Capital
Ken Patton has retired as president of Mercer Capital, and senior vice president Matthew R. Crow, the 15-year veteran of Mercer, has stepped into the position. Patton was a co-owner of Mercer having started with the firm in 1984 just two years after CEO Christopher Mercer founded the company. He served as president since the late 1980s.
Chris is staying on as CEO and has no immediate plans to retire, according to a quote in the local Memphis Business Journal. “I’m here and enjoying it,” he said. Glad to hear it!
What a difference risk makes in cost of capital calculations
Mike Pellegrino (Pellegrino and Associates) offered attendees at his BVR teleconference on An IP Cost of Capital Estimation Model, August 20th a simple example of the impact success rate estimates have on cost of capital determinations for early stage products and companies. Pellegrino's new model factors in observable market data for holding periods, success rates, and investor expectations to derive discount rates.
His example looks at a new cancer therapy that's about to enter preclinical trials--a classic example of early stage IP. Mike's CAPM for the IP estimates an unlevered cost of capital of 8.08%. He has data showing the historical success rate through the FDA is 15.8%, and the pharma company anticipates a 10 year holding period for the asset. Mike's model shows that the cost of capital for this situation is 29.98%.
However, "if the appraiser determines that this cancer treatment is particularly untested and risky," and decides that the success rate is only .1%, the cost of capital jumps to approximately 116%.
Pellegrino's point is that appraisers need observable market data to support their estimates for all components of early stage valuations--and that holding periods, investors' future expectations, and success rates are available from academic, financial, and other sources. His new model for IP cost of capital valuations if fully described in BVR's Guide to Intellectual Property Valuation.
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BVWire™ (ISSN 1933-9364) is published weekly by Business Valuation Resources, LLC
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