Contents

• Top Five Must-Haves for Tax Valuation Reports
• Survey Results for DLOM
• Credibility in Court—the View from the Bench
• The Discounting Decisions

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Valuations Insights, March, 2010

Survey Results for DLOM

A new survey by the BVWire™ on the current methods for calculating the discount for lack of marketability (DLOM) shows an increasing sophistication among business appraisers in their understanding and appreciation of the factual, legal, and empirical underpinnings of any DLOM conclusion. Following are some of the most interesting revelations from this survey and key points to consider in the assessment of your expert:

Experts agree on differentiation of marketability from minority risks.

In other words, DLOM is not DLOC (discount for lack of control). "No one who is competent aggregates them into one discount anymore," said one survey participant. Another participant noted that the two discounts "are not additive and represent different considerations: level of cash flow and control vs. liquidity."

How is Mandelbaum being handled?

In the seminal tax court case, Mandelbaum v. Comm'r, T.C. Memo 1995-255 (1995), Judge Laro, "[h]aving found limited refuge in the opinions of either expert," proceeded to determine the value of the marketability discount based on the following 10 criteria:

1. Private vs. public sales of the stock
2. Financial statement analysis
3. Dividend policy
4. Nature of the company: its history, industry position, and economic outlook
5. Company management
6. Amount of control in the transferred shares
7. Restrictions on transferability
8. Holding period for the stock
9. Company's redemption policy
10. Costs associated with a public offering

These criteria have since become known as the Mandelbaum factors, and for many appraisers, they serve as the starting point for any DLOM analysis. Still, they are seen as a guide only to maintain the line between valuation process and legal practice. Other methods are generally used to support DLOM conclusions besides Mandelbaum.

Finding method in the madness.

The survey identified the following four commonly accepted and applied methodologies for calculating marketability discounts (and one that is not):

1. Restricted stock studies (used by 90% of respondents).
2. IPO studies (56%).
3. Discounted cash flows (19%).
4. Options valuation models (16.7%).
5. Bajaj-type analyses—which follow Dr. Mukesh Bajaj's study of restricted stock transactions—do not seem to have gained much traction among the judiciary or legal and appraisal communities.

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