Empirical DLOM Studies – How to Value a Company (1 of 4)

10/22/2019|Business Valuation CPA|
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Comments on the Empirical Studies

During a business valuation, appraisers who cite empirical studies are guessing at the liquidation costs for the subject company. Experts will say, “this is the prescribed method adhered to in our profession” while failing to correlate any of the empirical studies to the subject company specifically. 

All of us who know how to value a company, should realize that the empirical studies most often cited are based on  (1) pre-IPO activity versus market price, and (2) Restricted Stock price versus market price during the required holding period (see 17 CFR § 230). 

Most business appraisals in a divorce context are neither pre-IPO nor subject to SEC holding-period restrictions. With that in mind, how can we rely on a marketability percentage discount from those studies? 

Those often-cited empirical studies date back more than five decades to 1966 when the 17 CFR § 230.144 holding period was two years. The holding period decreased to one year as of February 2008 and is currently at six months. The appraiser should ask themselves, “do any of the earlier studies make sense in today’s economy” and, “how relevant is each study to the subject entity?”

At a minimum, the appraiser should consider only the empirical studies that reflect a holding period similar to today’s market place, such as the following.

          Harris/TVA study  2007-2008                         18.1%

          FMV Opinions Study 1980-2010                     20.7%

          Pluris DLOM Study 2001-2012                         22.4%

          SRR Restricted Stock Study 2005-2010           9.3%

          Average                                                              17.6%

Ultimately, however, the dollar value of any estimated percentage should “make economic sense” when compared to the actual costs that can be reasonably estimated, such as management time or broker fees, accounting fees, and legal fees. Refer to the 116 page IRS job aid and search for the term “sense.”