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Empirical Evidence of Marketability Discounts 289 had to be able to withstand Securities and Exchange Commission [SEC], IRS or judicial review, particularly in light of the subsequent public offering.” The mean and median discounts for lack of marketability indicated by the aggregate of Emory’s eight studies of transactions that occurred five months prior to an IPO were 44 and 43 percent, respectively. For the most recent period studied, November 1995 to April 1997, the mean discount was 43 percent and the median discount was 42 percent (see Exhibit 8.9). Exhibit 8.9 Summary of the Emory Studies Period of Study Number of Transactions Mean Discount Median Discount _________________________ _____________________ ______________ _______________ May 1997–December 2000 (a) 283 50% 52% May 1997–December 2000 (b) 36 48% 44% May 1997–March 2000 (c) 53 54% 54% November 1995–April 1997 91 43% 42% January 1994–June 1995 46 45% 45% February 1992–July 1993 54 45% 44% August 1990–January 1992 35 42% 40% February 1989–July 1990 23 45% 40% August 1987–January 1989 27 45% 45% January 1985–June 1986 21 43% 43% January 1980–June 1981 13 60% 66% Combined Results (d) 593 47% 48% (a) The Expanded Study (b) The Limited Study (c) The Dot.Com Study (d) To avoid double counting, transactions from the Dot.Com and Limited Study are included only as a part of the Expanded Study The following is a brief explanation of each study: • January 1, 1980–June 20, 1981. Emory reviewed private placements of securities taking place prior to initial public offerings. The difference between the price of a security sold prior to the IPO and the offering price is the discount for lack of marketability. Emory examined 97 prospectuses of securities offered in the period from January 1, 1980, through June 30, 1981. Of the 97 IPOs, he chose 13 that involved “financially sound” companies and transactions that took place no more than five months prior to the IPO. Emory found that the private place- ments sold at a mean discount of 60 percent and a median of 66 percent. • January 1985–June 1986. Emory analyzed 21 IPOs and the transactions taking place immediately before the offerings. His analysis showed that the mean dis- count of the securities before the offerings is 43 percent with a median of 43 per- cent. Emory attributed the difference between the mean of this study (43 percent) and the mean of a similar study he performed in 1980 (60 percent) to the fact that the market for initial public offerings in 1986 was more active. • August 1987–January 1989. Emory reviewed the prospectuses of 98 IPOs, of which 27 met the study criteria of financial soundness, an IPO price greater than $5, and transactions taking place five months before the offering. He found that the mean discount of the securities sold before the initial public offering is 45 percent with a median of 45 percent. • February 1989–July 1990. Emory’s analysis of transactions of 23 companies showed that the mean discount for lack of marketability is 45 percent with a median of 40 percent. • August 1990– January 1992. Out of 35 transactions, Emory found that the mean discount on the price of the securities was 42 percent with a median of 40 percent. • February 1992– July 1993. Emory reviewed the transaction data of 54 compa- nies selling securities in IPOs. He found that the average discount on the price of the securities was 45 percent with a median of 44 percent. Consolidating the results of the six studies that he has performed, he found that the mean discount of the total 173 transactions to be 47 percent. • January 1994–June 1995. Emory evaluated 46 IPO transactions. Both the mean and median discounts on the purchase price of the securities before the IPO were 45 percent. The discounts ranged from 79 to 6 percent. Emory combined the results of all seven studies and found that the mean discount for the 219 trans- actions to date in all the studies was 45 percent and the median was 43 percent. • November 1995–April 1997. Emory evaluated 91 transactions. The mean and median discounts on these transactions were 43 and 42 percent, respectively. The range of discount was 5 to 85 percent. The combined results of the 310 transac- tions to date in all the Emory studies indicated a mean discount of 44 percent and a median discount of 43 percent. • May 1997–March 2000 (Dot.Com Companies). For the first time, Emory included Dot.Com companies in his study, and evaluated 53 transactions. The mean and median discounts on these transactions were 54 percent. • May 1997–December 2000. Emory prepared two studies based on his review of 1,847 IPO prospectuses over this period. In his “limited” study, he analyzed 36 transactions and found a mean discount of 48 percent and a median discount of 44 percent. In his “expanded” study, he broadened his search and did not elimi- nate companies on the basis of financial strength. The “expanded” study analyzed 283 transactions and found a mean discount of 50 percent and a median discount of 52 percent. Over the entire 11 studies from 1980 to 2000, the 593 transactions analyzed had a mean discount of 47 percent and a median discount of 48 percent. Willamette Management Associates Studies 11 Willamette Management Associates has published the results of 18 studies (time periods) that analyze IPO transactions that took place from 1975 to 1997. The premise of the studies was similar to that of the Emory studies; Willamette com- pared the sale price of stock placed privately before an IPO to the price at IPO to determine the discount for lack of marketability. The Willamette studies, however, reviewed transactions that took place from 1 to 36 months before the initial public offering, whereas Emory analyzed transactions up to five months prior to IPO. Emory used information provided in the company prospectuses while Willamette used S-1 and S-18 registration statements which dis- closed more information. Willamette also compared the price-earnings (P/E) multiple of the security at the time of the private transaction to the P/E multiple at the IPO. 290 VALUATION DISCOUNTS AND PREMIUMS 11 Pratt, Shannon P., Business Valuation Discounts and Premiums (New York: John Wiley & Sons, Inc., 2001), p. 84. Willamette also made adjustments to reflect differences in market conditions between the dates. To do this, Willamette used an Industry P/E multiple at the time of offering and compared it to the Industry P/E multiple at the time of the private transaction. Exhibit 8.10 presents the results of the Willamette studies. Exhibit 8.10 Lack of Marketability Discount Willamette Management Associates Summary of Discounts for Private Transaction P/E Multiples Compared to Public Offering P/E Multiples Adjusted for Changes in Industry P/E Multiples a Period of Study Median Discount 1975–1978 52.5% 1979 62.7% 1980–1982 56.5% 1983 60.7% 1984 73.1% 1985 42.6% 1986 47.4% 1987 43.8% 1988 51.8% 1989 50.3% 1990 48.5% 1991 31.8% 1992 51.7% 1993 53.3% 1994 42.0% 1995 58.7% 1996 44.3% 1997 35.2% a Pratt, Shannon P., Business Valuation Discounts and Premiums (New York: John Wiley & Sons, Inc., 2001), p. 84. Summary of the Emory and Willamette Initial Public Offering Studies The range of discounts associated with both the Emory and Willamette IPO studies is from a low of 32 percent to a high of 73 percent. The majority of the discounts are in the range of 40 to 60 percent. As discussed later, critics of these studies are concerned with the reliability of both the pre-IPO prices and the IPO prices. Hitchner Study No. 1 James R. Hitchner, CPA/ABV, ASA, in Atlanta, performed an additional analysis on the Emory study data. Emory reported average discounts for companies that had transactions in their stock within five months prior to IPO. Hitchner analyzed and cal- culated the discounts on transactions taking place in the fifth, fourth, and third months, respectively, prior to the date of the IPO to see if the discounts were higher for those companies that had transactions farthest from the IPO date. Hitchner also analyzed the discounts on transactions taking place up to five, four, and three months, respectively, prior to the date of the IPO. He also separately analyzed data on stock options only. Empirical Evidence of Marketability Discounts 291 292 VALUATION DISCOUNTS AND PREMIUMS Discounts on transactions occurring between January 1980 and June 1995 were broken into fifth-, fourth-, and third-month analyses up to and including each period. • Fifth Month. The mean and median discounts on the 47 transactions taking place in the fifth month prior to the IPOs were 54 and 50 percent, respectively. For the 219 transactions that took place within five months prior to the IPOs, the mean and median discounts were 45 and 43 percent, respectively. • Fourth Month. The mean and median discounts on the 43 transactions that took place in the fourth month prior to the IPOs were both 51 percent. For the 172 transactions that took place within four months prior to the IPOs, the mean and median discounts were 43 and 42 percent, respectively. • Third Month. The mean and median discounts on the 56 transactions taking place in the third month prior to the initial public offerings were 43 and 42 per- cent, respectively. For the 129 transactions that took place within three months of the initial public offerings (i.e. transactions at one, two, and three months prior to the initial public offerings), the mean and median discounts were 40 and 39 percent, respectively. Discounts on transactions occurring between January 1994 and June 1995 also were broken into fifth-, fourth-, and third-month analyses, at only that monthly period. • Fifth Month. For the most recent Emory study period, January 1994 to June 1995, the mean and median discounts on the 10 transactions that took place in the fifth month prior to the IPOs were 50 and 46 percent, respectively. The mean and median discounts on the 46 transactions that took place within five months prior to the IPOs were both 45 percent. • Fourth Month. For the January 1994 to June 1995 study period, the mean and median discounts on the 17 transactions that took place in the fourth month prior to the IPOs were 48 and 50 percent, respectively. The mean and median discounts on the 36 transactions that took place within four months prior to the IPOs were 43 and 45 percent, respectively. • Third Month. For the January 1994 to June 1995 study period, the mean and median discounts on the 11 transactions that took place in the third month prior to the IPOs were 44 and 43 percent, respectively. For the 19 transactions that took place within three months prior to the IPOs, the discounts were 39 and 38 percent, respectively. Discounts on option transactions occurring between January 1980 and June 1995 were divided into fifth-, fourth-, and third-month analyses. Most of the transactions included in the Emory study involved options. PHG analyzed the discounts on option transactions that took place in the fifth, fourth, and third months prior to the date of the initial public offerings. • Fifth Month. The mean and median discounts on the 32 option transactions that took place in the fifth month prior to the IPOs for the aggregate Emory studies were 55 and 51 percent, respectively. The mean and median discounts on the 166 option transactions that took place within the five months prior to the IPOs were 44 and 43 percent, respectively. • Fourth Month. The mean and median discounts on the 31 option transactions that took place in the fourth month prior to the IPOs for the aggregated Emory Empirical Evidence of Marketability Discounts 293 studies were 52 and 51 percent, respectively. The mean and median discounts on the 134 option transactions that took place within four months prior to the IPOS were 42 and 41 percent, respectively. • Third Month. The mean and median discounts on the 45 option transactions that took place in the third month prior to the IPOs for the aggregate Emory studies were 41 and 40 percent, respectively. The mean and median discounts on the 103 option transactions that took place within three months prior to the IPOs were 39 and 37 percent, respectively. Discounts on option transactions occurring between January 1994 and June 1995 also were divided into fifth-, fourth-, and third-month analyses. For the Emory study period, January 1994 to June 1995, the mean and median discounts on option transactions were 44 and 43 percent, respectively. • Fifth Month. For the January 1994 to June 1995 study period, the mean and median discounts on the eight option transactions that occurred in the fifth month prior to the IPOs were 53 and 49 percent, respectively. The mean and median discounts on the 33 option transactions that took place within five months prior to the IPOs were 44 and 43 percent, respectively. • Fourth Month. For the January 1994 to June 1995 study period, the mean and median discounts on the 12 option transactions that occurred in the fourth month prior to the IPOs were 47 and 48 percent, respectively. The mean and median discounts on the 25 option transactions that took place within four months prior to the IPOs were 42 and 38 percent, respectively. • Third Month. For the January 1994 to June 1995 study period, the mean and median discounts on the nine option transactions that took place three months prior to the IPOs were both 43 percent. For the 13 option transactions that took place within three months prior to the IPOs, the discounts were 37 and 33 per- cent, respectively. Hitchner Study No. 2 Hitchner performed a second analysis that was very similar to that performed by John Emory in his studies. Hitchner reviewed the prospectuses of guideline compa- nies from February 1995 to June 1996 in the consulting industry that had gone pub- lic. This analysis focused on transactions that had taken place within the companies prior to their IPOs. Hitchner found 23 transactions that had taken place among 14 companies within 15 months of their IPO. The mean and median discounts on the 23 transactions that took place prior (up to 15 months) to the initial public offerings were 51 and 52 percent, respectively. • Fifth Month. The mean and median discounts on the transactions that took place in the fifth month prior to the IPOs were 49 and 53 percent, respectively. The mean and median discounts on the transactions that took place within five months prior to the IPOs were 44 and 36 percent, respectively. • Fourth Month. The mean and median discounts on the transactions that took place in the fourth month prior to the IPOs were 56 and 57 percent, respectively. The mean and median discounts on transactions that took place within four months prior to the initial public offerings were 41 and 36 percent, respectively. 294 VALUATION DISCOUNTS AND PREMIUMS • Third Month. The mean and median discounts on the transactions that took place in the third month prior to the IPOs were both 31 percent. The mean and median discounts on the transactions that took place within three months prior to the IPOs were 31 and 35 percent, respectively. Exhibit 8.11 illustrates the analysis of the guideline company transactions. Exhibit 8.11 Analysis of Transactions Occurring In Guideline Companies IPO Approx. Guideline IPO Price Trans. Trans. Type of No. Company Date ($) Date Price ($) Trans. Disc. of Mo. _________ ______ ____ ________ _______ _________ _____ _______ Whittman Hart (1) 5/3/96 16 12/31/95 6.49 Option 59% 4 Carnegie Group (2) 12/4/95 8 3/1/95 *4.65 Option 42% 9 Cotelligent Group (3) 2/14/96 9 9/8/95 2.70 Option 70% 5 Data Processing Res. (4) 3/6/96 14 1/15/96 9.00 Option 36% 2 Data Processing Res. (5) 3/6/96 14 6/1/95 2.25 Option 84% 9 Data Processing Res. (6) 3/6/96 14 3/1/95 *2.25 Purchase 84% 12 Integrated Systems (7) 4/18/96 5 1/31/95 1.52 Option 70% 15 Integrated Systems (8) 4/18/96 5 11/17/95 3.33 Option 33% 5 Microware (9) 4/3/96 10 5/2/95 3.13 Option 69% 11 Registry, Inc. (10) 6/5/96 17 3/6/96 11.00 Option 35% 3 Registry, Inc. (11) 6/5/96 17 4/1/96 *11.00 Option 35% 2 Registry, Inc. (12) 6/5/96 17 5/1/96 *13.00 Option 24% 1 Ultradata (13) 2/16/96 10 7/31/95 6.00 Option 40% 7 Ultradata (14) 2/16/96 10 12/1/95 *7.25 Option 28% 3 Sykes (15) 4/30/96 18 12/31/95 8.67 Option 52% 4 APAC (16) 10/11/95 16 5/26/95 7.49 Option 53% 5 HCIA (17) 2/22/95 14 2/1/94 *10.50 Option 25% 13 HCIA (18) 2/22/95 14 4/1/94 *10.50 Option 25% 11 HCIA (19) 2/22/95 14 10/1/94 *10.50 Option 25% 5 Idx (20) 11/17/95 18 2/1/95 4.32 Option 76% 10 Mecon (21) 12/7/95 13 3/31/95 0.57 Option 96% 8 UUNet (22) 5/25/95 14 2/1/95 *6.00 Option 57% 4 UUNet (23) 5/25/95 14 1/1/95 *5.00 Option 64% 5 Discounts Mean Median ________ _____ _______ Overall 51% 52% At Five Months 49% 53% Five Months or Less 44% 36% At Four Months 56% 57% Four Months or Less 41% 36% At Three Months 31% 31% Three Months or Less 31% 35% *Only month and year of transaction available. Assumed the first of the month because specific day was not available. Restricted Stock Studies Additional support for the discount for lack of marketability can be found in the study of purchases of restricted securities by investment companies. Investment companies regularly purchase private placements of restricted secu- rities. Restricted securities may be issued and sold by a publicly traded company without prior registration with the Securities and Exchange Commission. These securities typically cannot be resold for a minimum period of one year under the SEC Rule 144 guidelines. Because of the restriction on the marketability of the securities, the investment companies purchase the securities at prices lower than the price of a registered secu- rity of the same company. The difference between the two prices represents the dis- count for the lack of marketability. In the 1970s, the SEC required investment companies to make their transaction records public. The availability of the records made it possible for analysts to directly determine the lack of marketability discount on securities purchased by investment companies and use it as a comparison for the discount on a closely held interest. Revenue Ruling 77-287 The ruling also discusses a study undertaken by the SEC, published in 1971 and covering the period from January 1, 1966, through June 30, 1969. 12 The SEC ana- lyzed the purchases, sales, and holdings of restricted securities held by financial insti- tutions that disclosed the valuation of their holdings. The average discount was about 26 percent for all companies. In Accounting Release No. 113, the SEC acknowledged discounts for restricted securities. Restricted securities are often purchased at a discount, frequently substan- tial, from the market price of outstanding unrestricted securities of the same class. This reflects the fact that securities which cannot be readily sold in the public market place are less valuable than securities which can be sold, and also the fact that by the direct sale of restricted securities, sellers avoid the expense, time and public disclosure which registration entails. Empirical Evidence of Marketability Discounts 295 The IRS, in Revenue Ruling 77-287, dealt with the issue of valuing restricted stocks. It was issued “to provide information and guidance to taxpayers, Internal Revenue Service personnel, and others concerned with the valuation, for Federal tax purposes, of securities that cannot be immediately resold because they are restricted from resale pursuant to Federal securities laws.” ValTip 12 Securities and Exchange Commission, “Discounts Involved in Purchases of Common Stock (1966–1969),” Institutional Investor Study Report of the Securities and Exchange Commission (Washington, DC: U.S. Government Printing Office, March 10, 1971), Document No. 92-64, Part 5, pp. 2444–2456. 296 VALUATION DISCOUNTS AND PREMIUMS Securities and Exchange Institutional Investor Studies. Securities and Exchange Commission, “Discounts Involved in Purchases of Common Stock (1966–1969),” Institutional Investor Study Report of the Securities and Exchange Commission (Washington, DC: U.S. Government Printing Office, March 10, 1971), Document No. 92-64, Part 5, pp. 2444–2456. Period of Study _________________ Mean Discount of 25.8 percent 1966–1969 The Securities and Exchange Commission reviewed purchases of restricted securities by investment companies for the period January 1, 1966 through June 30, 1969. This study was published in March 1971. It compared the prices at which the transactions of restricted securities were made to the prices of publicly traded stocks from the same companies. The study included letter stocks traded on the New York and American Stock Exchange as well as the over-the-counter (OTC) markets. The mean discount for lack of marketability of the letter stocks was 25.8 percent. The study analyzed discounts both by trading market as well as by sales of the company. Of the OTC nonreporting companies, 56 percent had discounts over 30 percent; 34 percent of the companies had discounts over 40 percent. For companies with sales between $1 million and $5 million, 54 percent had discounts over 30 per- cent; 34 percent of the companies had discounts over 40 percent. Other Restricted Stock Studies. Several additional studies since the 1971 Institutional Investor Study have measured the DLOM using similar comparisons between restricted securities and their publicly traded counterparts. The results of these studies have generally averaged between 30 and 35 percent. Many of these studies were conducted during the period when securities were restricted for two years. The more important studies and their results are summarized in Exhibit 8.12. Hall and Polacek. Hall, Lance S., and Polacek, Timothy G., “Strategies for Obtaining the Largest Valuation Discounts,” Estate Planning (January/February 1994), pp. 38– 44. Period of Study _________________ Mean Discount of 23 percent 1979– 1992 The authors discuss relevant factors for determining the taxable value of an estate. These factors include the criteria outlined by relevant IRS Revenue Rulings as well as the court-allowed discounts for minority interest and lack of marketabil- ity. The authors define the purpose for the discounts, evaluate historical trends in court-allowed discounts, and review several methods for determining the appropri- ate discount for each situation. The minority interest discount and the lack of marketability discount are sepa- rate and distinguishable from each other. The study identifies them as “based upon independent financial principles and analyses.” Silber. Silber, William L., “Discounts of Restricted Stock: The Impact of Illiquidity on Stock Prices,” Financial Analysts Journal (July–August 1991), pp. 60– 64. Period of Study _________________ Mean Discount of 33.75 percent 1981–1988 Silber developed a model that describes the relationship of the discount to restricted securities and the factors that affect the discount. Using data provided by the Securities Data Corporation, the author analyzed reported transactions of restricted stock sales from 1981 to 1988. Of the 310 private placements of common stock of public companies, Silber chose 69 transactions that carried no “warrants or special provisions.” “For each of these 69 companies, we recorded the date of the private placement, the price per share of the restricted stock and the closing price (or the average of the bid and offer prices) for the company’s publicly traded shares on the placement date.” Silber compared the securities based on several characteristics, including the “percentage discount on the restricted stock, dollar size of the offering and number of restricted shares as a percentage of all common stock.” He also looked at “the earnings of the firm during the previous fiscal year, total revenues during the previ- ous fiscal year and market capitalization prior to the private placement.” Analysis of these transactions showed an average price discount of 33.75 percent. The dis- counts ranged from 84 percent to a premium (negative discount) in one case of 12.7 percent. Further segregation of the data into discounts less than and greater than 35 percent indicates that “firms with higher revenues, earnings and market capitaliza- tions are associated with lower discounts.” Empirical Evidence of Marketability Discounts 297 Exhibit 8.12 Summary of Studies of Restricted Securities Transactions Discount for Study Period of Study Lack of Marketability _____ _____________ __________________ Securities Exchange Commission 1966 – 1969 26% Hall and Polacek 1979 – 1992 23% Silber 1981 – 1988 33.75% Stryker and Pittock 1978 – 1982 45% Maher 1969 – 1973 35% Gelman 1968 – 1970 33% Moroney 1969 – 1973 a 35.6% Trout 1968 – 1972 33.45% Arneson Opinion b 50% or greater Willamette 1981 – 1984 31.2% Management Planning, Inc. 1980 – 1995 28% FMV Opinions, Inc. 1980 – 1997 22% Johnson Study 1991 – 1995 20% Columbia Financial Advisors Inc. 1996 – 1997 21% Columbia Financial Advisors Inc. c 1997 – 1998 13% a Moroney did not state the exact time period of his study of restricted stocks, but it is within this time frame. b The author used the 35 percent mean discount of the Maher study as a base discount. He then supports a higher discount based upon his analysis of the SEC letter stock study and other SEC studies. c The effect of the SEC Rule 144 change from a two-year waiting period to a one-year waiting period. 298 VALUATION DISCOUNTS AND PREMIUMS Using the relationships that he found in his analysis, Silber developed a statis- tical model that described the discount as a function of the: • Credit-worthiness of the issuing company • Marketability of the shares • Cash flow • Special (value-added) concessions to the investor Silber defined the measurable “proxies” for each of the factors. Earnings and revenues were used to measure creditworthiness. The amount of restricted shares issued as a percent of total shares outstanding was used to measure marketability. Special provisions such as “guarantees of representation on the company’s board” or “a customer relationship between investors and issuer,” also were included in the model. Using the least squares statistical model, Silber defined the relationships among the factors. His results indicate that: • “The size of the price penalty [discount] varies with firm and issue character- istics.” • The size of the block of restricted securities issued affects the size of the discount more than the amount of revenues of the company. • As the amount of restricted securities issues increases, those securities become less liquid and the issuer will have to sell them at a greater discount. Silber concludes: “The results indicated that marketing a large block of illiq- uid securities requires significant prior concessions, even with firms with substan- tial creditworthiness. Liquidity clearly has a significant impact on the cost of equity capital.” Stryker and Pittock. Stryker, Charles, and Pittock, William F., “Revenue Ruling 77-287 Revisited,” SRC Quarterly Reports (Spring 1983), pp. 1– 3. Period of Study _________________ Median Discount of 45 percent 1978–1982 In the manner of the SEC study on letter stock, Standard Research Consultants analyzed 28 restricted stock purchases that occurred from October 1978 through June 1982. Comparing the value of restricted stocks to public stocks issued by the same company, they found the median discount at which the restricted stocks sold to be 45 percent. According to the authors: To be eligible for inclusion in our study, the private placement had to involve the common stock (or the common stock with purchase war- rants) of a United States corporation and had to occur as an arm’s-length transaction between unrelated parties which did not affect control of the corporation. In addition, the corporation could not be in a state of bank- ruptcy; nor could it be a financial, insurance, or real estate company. [...]... % 3rd Quartile % 4th Quartile % Revenues Median Mean 18.7 21.8 22.2 23.9 31.5 31.9 36.6 34. 7 Earnings Median Mean 16.1 18.0 30.5 30.0 32.7 30.1 39 .4 34. 1 Market Price/Share Median Mean 23.3 23.3 22.2 24. 5 29.5 27.3 41 .0 37.3 Price Stability Median Mean 34. 6 34. 8 31.6 33.3 19.2 21.0 19 .4 22.0 Earnings Stability Median Mean 14. 1 16 .4 26.2 28.8 30.8 27.8 44 .8 39.7 Factors with Some Correlation... 30.8 29.1 28 .4 25.6 19.6 24. 2 Revenue Growth Median Mean 28.2 26.2 25.0 25.0 28.0 29.1 39 .4 31.7 Earnings Growth Median Mean 24. 3 26.2 17.7 19.5 35.2 33.7 34. 2 32.6 Revenue Stability Median Mean 29.1 27 .4 12.6 15.6 34. 3 34. 7 41 .0 34. 4 FMV Opinions Study FMV Opinions, Inc., reviewed 243 restricted stock transactions from 1980 through April 1997 This study was initially reported in Valuation Strategies17... 4th Quartile % Market Capitalization Median Mean 29.9 33.0 25 .4 26.2 26.9 26.0 22.5 26.3 Block Size (Shares) Median Mean 29.9 31.8 30.0 29.6 27.0 26.6 19.6 23.2 Three-Month Median Period to Trade Mean 30.7 30 .4 29.9 30.1 27.9 26.6 19.6 24. 2 # of Weeks Median Trading Volume Mean to Sell 30.7 32 .4 30.8 29.1 28 .4 25.6 19.6 24. 2 Block Size/ Trading Median Mean 30.7 32 .4 30.8 29.1 28 .4 25.6... Business Valuation Discounts and Premiums (New York: John Wiley & Sons, Inc., 2001), p 1 84 23 David B Chaffe III, “Option Pricing as a Proxy for Discount for Lack of Marketability in Private Company Valuations,” Business Valuation Review (December 1993) 3 14 VALUATION DISCOUNTS AND PREMIUMS Measuring the Amount of Discount for Lack of Marketability Each method of determining a DLOM has its strengths and. .. securities valuation methods and transaction data (SEC Accounting Series Release No 113, dated October 21, 1969, and Accounting Series Release No 118, dated December 23, 1970) By the end of 1968, open-end and close-end registered investment companies held over $4. 2 billion in 302 VALUATION DISCOUNTS AND PREMIUMS restricted equity securities A review of the prices at which investment companies purchased 146 ... Held Companies, 4th ed (New York: McGraw-Hill, Inc.), p 40 0 14 Christopher Z Mercer, Quantifying Marketability Discounts (Peabody Publishing, L.P., 1997), pp 350 – 355 (Used with permission.) Note: This study has been updated See Chapter 5 of Handbook of Advanced Business Valuation, Robert F Reilly and Robert P Schweihs, eds (New York: McGraw-Hill, Inc., 2000) 306 VALUATION DISCOUNTS AND PREMIUMS •... company size and history Noncash costs of underwriting Timing and length of time necessary to go public 3 04 VALUATION DISCOUNTS AND PREMIUMS He concludes that the discount for lack of marketability for a closely-held company should be closer to 50 percent or greater • Costs of Flotation Arneson evaluated the cost of flotation and determined that the cost should include compensation to underwriters and other... privately placed stock (Rule 144 A) in the past several years offers an explanation As activity in a market increases, more and better information becomes available In addition, there are now more participants in the market for restricted stocks due to Rule 144 A and, therefore, increased liquidity This would tend to decrease discounts because better information results in less risk and thus a lower required... although we have no way to verify this Since June 1995, the SEC proposed amendment to Rule 144 was published for public comment Therefore, knowledgeable private placement and Rule 144 A market participants were most likely aware of the proposed changes.20 The average discount for the second study, after the Rule 144 holding period was shortened to one year, was 13 percent The range of discounts in the... the courts is oversimplistic as each valuation has its own unique facts and circumstances that must be reflected in the selection of discounts • Valuation analysts who rely solely on empirical studies without analysis may understate discounts and overstate value • Valuation analysts often fail to support discounts with sound reasoning and considered analysis • In the valuation of stock in most closely . 2000 (b) 36 48 % 44 % May 1997–March 2000 (c) 53 54% 54% November 1995–April 1997 91 43 % 42 % January 19 94 June 1995 46 45 % 45 % February 1992–July 1993 54 45% 44 % August 1990–January 1992 35 42 % 40 % February. 60.7% 19 84 73.1% 1985 42 .6% 1986 47 .4% 1987 43 .8% 1988 51.8% 1989 50.3% 1990 48 .5% 1991 31.8% 1992 51.7% 1993 53.3% 19 94 42.0% 1995 58.7% 1996 44 .3% 1997 35.2% a Pratt, Shannon P., Business Valuation. 1989–July 1990 23 45 % 40 % August 1987–January 1989 27 45 % 45 % January 1985–June 1986 21 43 % 43 % January 1980–June 1981 13 60% 66% Combined Results (d) 593 47 % 48 % (a) The Expanded Study (b) The