Professional Documents
Culture Documents
2011 NACVA Annual Conference RJG Section
2011 NACVA Annual Conference RJG Section
Discounts
Presenters:
Robert J. Grossman, CVA, CPA/ABV, ASA, CBA
Espen Robak, CFA
June 8, 2011
San Diego, California
TABLE OF CONTENTS
Summit on DLOM
– San Diego – September 18, 2008
Howard Lewis Comments:
– Market‐based data is best in supporting discounts
– Percentage discount should reflect valuator effort
– Georgetown University – November 9, 2010
David Laro Comments:
– “No methods currently available to business
valuators could successfully defeat Daubert
challenge.”
OVERVIEW & REVIEW
OF FUNDAMENTALS
Burden of Proof
– The burden of proving the propriety of the
discounts and/or premiums utilized falls,
ultimately, to the business valuator
– The most common basis for not successfully
defending discount level challenges is the failure
to properly reconcile the subject equity interest
characteristics with third party inferential
observations
OVERVIEW & REVIEW
OF FUNDAMENTALS
Fundamentals
– Fair market value set by market
OVERVIEW & REVIEW
OF FUNDAMENTALS
Fundamentals
– Fair market value set by market
– Investors are risk adverse
OVERVIEW & REVIEW
OF FUNDAMENTALS
Fundamentals
– Fair market value set by market
– Investors are risk adverse
– Base of application must be defined
OVERVIEW & REVIEW
OF FUNDAMENTALS
Fundamentals
– Fair market value set by market
– Investors are risk adverse
– Base of application must be defined
– No “prescribed” ranges of discounts/premiums
OVERVIEW & REVIEW
OF FUNDAMENTALS
Fundamentals
– Fair market value set by market
– Investors are risk adverse
– Base of application must be defined
– No “prescribed” ranges of discounts/premiums
– DLOC & DLOM are separate and distinct
OVERVIEW & REVIEW
OF FUNDAMENTALS
Fundamentals
– Fair market value set by market
– Investors are risk adverse
– Base of application must be defined
– No “prescribed” ranges of discounts/premiums
– DLOC & DLOM are separate and distinct
– DLOC & DLOM are multiplicative, NOT additive
OVERVIEW & REVIEW
OF FUNDAMENTALS
Fundamentals
– Fair market value set by market
– Investors are risk adverse
– Base of application must be defined
– No “prescribed” ranges of discounts/premiums
– DLOC & DLOM are separate and distinct
– DLOC & DLOM are multiplicative, NOT additive
– Minority interests do not total to proportionate
share of enterprise value
OVERVIEW & REVIEW
OF FUNDAMENTALS
a
$10.00 Value of control shares
per share
– Contractual restrictions
• Loan agreements with restrictive covenants
CONTROL PREMIUMS
AND MINORITY DISCOUNTS
Valuation Platforms
– Income Approach
• Capitalized returns
• Discounted future returns
Valuation Platforms
– Market Approach
• Guideline company method:
minority freely‐traded value
• Merger and acquisition method:
control marketable value
– Asset‐Based Approach
• Net asset value method
• Excess earnings method
• Control marketable value
CONTROL PREMIUMS
AND MINORITY DISCOUNTS
Range of CONTROL
MINORITY
CONTROL PREMIUMS
AND MINORITY DISCOUNTS
Factset Mergerstat®
– Excludes negative premiums from average
– 2010 Average – 51.5%
• With negative premium 46.5%
– 2010 Median – 34.6%
• With negative premium 32.5%
CONTROL PREMIUMS
AND MINORITY DISCOUNTS
Factset Mergerstat®
– 5 Highest premiums
• 203.9% to 433.3%
– 5 Lowest premiums
• ‐50.1% to ‐97.0%
Factset Mergerstat®
– 2010 Distribution
60% to 80% 33 9%
80% to 99.9% 16 5%
Factset Mergerstat®
– Use of Factset Mergerstat® as a baseline measure of
control premiums requires careful consideration and
judgment
CONTROL PREMIUMS
AND MINORITY DISCOUNTS
Factset Mergerstat®
– Synergistic considerations
• Premiums include control considerations and
synergistic considerations.
REV. RUL. 93-12 & “SWING VOTE”
CONSIDERATIONS
Determinations
– Historically, benchmark methodologies based on IPO
Studies and Restricted Stock Studies
LACK OF MARKETABILITY
DISCOUNTS
Alternative Methodologies
– Quantitative Marketability Discount Model (QMDM)
• DCF modeling incorporating holding period
– Hedging Models
• Not so useful for smaller privately‐held companies
LACK OF MARKETABILITY
DISCOUNTS