Marketability – Mandelbaum Factors

How to value a company in a business valuation:

Appraisers often consider the “Mandelbaum factors” when quantifying the difficulty (cost) of liquidating an investment in a subject company. In Mandelbaum v. Commissioner, a 1995 Tax Court case, Judge Laro dealt with opposing experts whom each relied on empirical studies most often cited by appraisers. Mandelbaum sought a 70% discount while the IRS came up with 30%. Ultimately, Judge Laro came back with company-specific factors that he thinks should be considered by the appraiser to adjust the averages found in benchmark studies.  Those nine factors are shown here:

· Financial statement analysis

· Dividend policy

· Nature of the company (history, position in the industry, economic outlook)

· Company’s management

· Amount of control in the transferred shares

· Restrictions on transferability of stock

· The holding period for stock

· Company’s redemption policy

· Costs associated with a public offering

The Mandelbaum factors provide a structured framework for assessing the difficulty and cost of liquidating an investment, offering a more nuanced approach than simply relying on broad empirical studies. While they do not produce a direct dollar value for private or micro-sized firms, they help appraisers understand the economic forces that influence marketability.

One of the key benefits of the Mandelbaum analysis is its ability to break down liquidity constraints into measurable components. These factors—such as company size, financial performance, dividend policy, and transfer restrictions—offer a qualitative assessment that enhances the credibility of an appraiser’s discount for lack of marketability (DLOM). Rather than relying solely on historical discount data from restricted stock or pre-IPO studies, the Mandelbaum approach encourages appraisers to justify their conclusions using company-specific characteristics, making their analysis more defensible in audits, disputes, and litigation.

However, the analysis has its limitations. For firms that have no plans to go public, the cost considerations associated with IPOs may not be directly relevant. Additionally, the Mandelbaum factors do not yield a precise cash outlay or liquidity adjustment, requiring appraisers to use judgment in assigning weights to each factor. Blindly applying the Mandelbaum factors without deeper consideration can lead to arbitrary or unsupported conclusions.

In practice, the Mandelbaum framework is most effective when used in conjunction with empirical studies, allowing appraisers to contextualize discount rates within a specific company’s operational and financial realities. By combining these approaches, appraisers can create a more transparent and defensible valuation, particularly in tax or litigation settings where scrutiny is high.