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Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Defining, Measuring & Defining, Measuring & Defending Discounts Defending Discounts for Lack of Liquidityfor Lack of Liquidity
A Teleconference from Business Valuation Resources
1-888-BUS-VALU (287-8258)
www.bvresources.com
info@bvresources.com
April 25, 2007
Moderator: Shannon Pratt, CFA, FASA, MCBA, CM&AA, of Shannon Pratt Valuations, LLC
Panelists: Ashok Abbott, M.B.A., Ph.D. of Business Valuation, LLC
Rob Schlegel, ASA, MCBA of Houlihan Valuation Advisors
© Ashok Abbott, presentation created in collaboration with BVR© Ashok Abbott, presentation created in collaboration with BVR
2
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Ancillary Reading Materials• Defining, Measuring & Defending Discounts for Lack of Liquidity
PDF and PowerPoint Presentation
• Does the ‘Myth of Liquidity’ Lead to Incorrect Discounts? special
report from the December 2006 Business Valuation Update
• Full court decisions and Business Valuation Update abstracts for
related tax cases listed on slides 62 & 63 (abstract and decision
not available for Barnes v. Commissioner and abstract not
available for Estate of Berg v. Commissioner)
• All downloads and links available at the BVR Teleconference pre-
conference reading page:
http://www.bvresources.com/defaulttextonly.asp?
f=tcreading042507
3
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Learning Objectives• Learn the distinguishing features between liquidity and
marketability
• Learn how to measure discounts for lack of liquidity and the cost of
going public
• Learn how to apply our model using recent court cases
• Understand how to utilize this area’s new research in your practice
4
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Submitting Questions• Email tc-questions@bvresources.com at any time during the
Teleconference
• The final 20-30 minutes is dedicated to telephone questions; the
conference operator will announce Q&A time and provide
instructions on how to join the queue
5
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
IntroductionIntroduction
6
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Introduction• Traditionally, appraisers have cited studies of pre-initial public
offering and restricted stock to conclude discounts for lack of
marketability in the 20-50% range
• Over the last three years, the Tax Court has rejected discounts
for lack of marketability based on the average discount found in
restricted stock studies
• The latest rejection of the Quantitative Marketability Discount
Model (QMDM) was in the Estate of Temple (March 2006)
• There is a trend towards courts rejecting averages, and
requiring specific transactions that are as close as possible to
the subject company, and specific evidence of similar
characteristics
7
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Levels of Value
Notes:· Control shares in a privately held company may also be subject to some discount for lack of marketability, but usually not nearly as much as minority
shares.· Minority and marketability discounts normally are multiplicative rather than additive. That is, they are taken in sequence:
$10.00 Control Value- 2.00 Less: Minority interest discount (.20 x $10.00)
$ 8.00 Marketable minority value- 3.60 Less lack of Marketability discount (.45 x 8.00)$ 4.40 Per-share value of non-marketable minority shares
Value of non-marketable minority (lack of control) shares
Value of restricted stock of public company
“Publicly traded equivalent value” or “Stock Market value” of minority shares if freely traded
Value of control shares
Synergistic (Strategic) Value
$4.40 per share
$6.00 per share
$8.00 per share
$10.00 per share
$12.00 per share
Control Premium
Minority Discount
Discount for restricted stock of public company
Additional discount for private company stock
20% strategic acquisition premium
20% minority interest discount; 25% control premium
25% discount for lack of marketability for restricted stock
Additional 20% discount for private company stock (taken from publicly traded equivalent value $8 per share)
45% total discount for lack of marketability (25% + 20% may be taken additively)
A combined 20% discount and a 45% discount for lack of marketability equals a total of 56% discount from value of control shares
Source: Guide to Business Valuations, Exhibit 8.8; it also appears in Standards of Value: Theory and Applications by Jay Fishman, Shannon Pratt and William Morrison, page 132
8
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Discount Landscape• Subjective discounts are not acceptable
• Courts have clearly indicated that they are looking for firm
specific measures, supported by clear, relevant, empirical
analysis
• Scientific method is required to identify and substantiate
discounts
9
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Core Concepts
• Marketability
• Liquidity
• Holding period
• Liquidation period
• Price pressure
• Price risk/volatility
10
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Formal Definitions• Marketability versus liquidity: ASA definitions adopted July 2004
• Marketability: The capability and ease of transfer or salability of
an asset, business, business ownership interest or security
• Liquidity: The ability to readily convert an asset, business,
business ownership interest or security into cash without
significant loss of principal
11
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Marketability & Liquidity: What’s the Difference?• Marketability denotes the right to sell an asset in an established
and efficient capital market (public or private), within a
reasonable time, with relatively low transaction costs, and with
minimal effect on that security’s public market price
• Liquidity denotes the ability to convert an asset into cash
without diminishing its value; liquidity is a spectrum
• A block with high liquidity will have low transaction costs, a
short liquidation period and minimal discounts (e.g., bid-ask
spread)
• A block with low liquidity will have opposite characteristics
12
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
• Registered stock in an Exchange-listed publicly traded firm
• Registered stock in an Exchange-listed publicly traded firm subject
to Reg. 144 restrictions
• Unregistered stock in an Exchange-listed publicly traded firm
• Unregistered stock in a closely held unlisted large firm (potential
to go public)
• Unregistered stock in a closely held unlisted small firm
Marketability
13
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Liquidity Differences within Marketability Classes• Liquidity can differ significantly within each marketability class,
based on the attributes of the asset
• A significant block of Dow Jones Industrial Average included firm
can be liquidated relatively easily, while stock of a small over the
counter (OTC) firm may find few buyers in the short run without
offering significant discounts
14
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Publicly Traded Publicly Traded Equivalent ValueEquivalent Value
15
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Publicly Traded Equivalent Value• Capital Asset Pricing Model (CAPM), Ibbottson premiums, or build-
up rates using capital market proxies (e.g., small stock premium)
provide an estimate of the publicly traded equivalent value
(“PTEV”) of a privately held company
16
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Liquidity Assumptions of the Publicly Traded Equivalent Value
Finance literature recognizes four dimensions of liquidity:
• Width (availability of a large number of buyers)
• Depth (ability to absorb large volume)
• Immediacy (ability to complete the transaction quickly)
• Resiliency (absorbing large volume of trades without moving the
price)
17
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Core Issue in Liquidity: Immediacy • Assumption: Market orders have immediate execution
• Reality: Small at-the-market transactions of high trading
volume public securities approach immediate execution
• Large block transactions of thinly traded public securities are
likely to occur off the floor or may need to dribble out
• Even for actively traded shares, orders for above 10,000 shares
may not be subject to the current bid-ask quote
• Either way, a substantial delay and blockage discount may be
relevant
18
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Effect of Liquidity on Security Pricing & Returns
• Research shows significant difference between returns on liquid
and illiquid publicly traded securities:
• Brennan and Subrahmanyam (1996) show the return difference
of the most liquid and least liquid shares on the New York Stock
Exchange is 6.62% per year
• This difference roughly translates to a discount for lack of
liquidity (DLOL) of 35.5%
19
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Bid-ask Spread & Liquidity• Amihud and Mendelson (1986) demonstrate that stocks with
higher bid-ask spreads have longer holding periods, thus lower
trading activity
• Stoll (1978) and Stoll (2000) suggest that trading activity plays an
important role in explaining the cross-sectional variation in bid-ask
spreads
20
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Recent Changes in Market Liquidity• Difference between liquidity of large market cap stocks and small
market cap stocks has increased
• The holding period for SEC Rule 144 securities has been reduced
from two years to one year
• Bid and ask spreads have declined with the change from fraction-
of-a-dollar prices to decimal prices
• Overall market trading volume has gone up several-fold in recent
years; this is partly attributable to program trading strategies
21
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Changes in Market Changes in Market Liquidity & Private Liquidity & Private CompaniesCompanies
22
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Changes in Market Liquidity& Private Companies• Minority interests in private companies have not benefited from
the increased liquidity in the public markets
• Consequently, the value difference between closely held minority
interests and their assumed publicly traded counterparts has
widened in recent years
• SEC empirical studies covered larger publicly traded firms during
years in which the public markets were less liquid; these studies
may understate the actual discount for lack of marketability and
ignore the potential discount for lack of liquidity for smaller firms
23
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Market Profile : Large StocksAverage market Capitalization $22,856 Million
Variable Mean Std Dev t Pr > |t|
No Trade days 0.09% 3.03% 48.5 0.0001
Bid ask spread 3.24% 3.82% 1357.92 0.0001
Cost to trade* 0.49% 142.36% 5.48 0.0001
24
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Market Profile: Small Stocks Average market Capitalization $17.70 Million
Variable Mean Std Dev t Pr > |t|
No Trade days 23.88% 42.63% 848.32 0.0001
Bid ask spread 13.78% 14.40% 1449.00 0.0001
Cost to trade* 10.45% 13.47% 1174.67 0.0001
25
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Security Markets LiquidityDifferences Between Small and Large Stocks
• There are significant differences among publicly traded firms of
different sizes
• Among the smaller stocks, 24% do not trade at all on a given day
• The observed bid-ask spread is around 14%
• The measured cost of trading for small lots for smaller firms is
around 10%
• Largest firms are much more liquid, have lower spreads and are
less costly to trade
26
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Holding Period Vs. Holding Period Vs. Liquidation PeriodLiquidation Period
27
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Holding Period• Holding period is discretionary
• Investors elect to hold an asset for a certain period based on their
investment preferences and expected returns
28
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Liquidation Period• Liquidation period is determined by the prevailing market
conditions
• Liquidation period the time needed to liquidate a position in a
manner that minimizes the total cost of the price pressure and
price risk faced by the seller in response to the market availability
of buyers and sellers
29
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Discount for Lack of Liquidity Function of Liquidation Period
• Discount for lack of liquidity is tied to the anticipated liquidation
period, not the discretionary holding period
• A willing buyer will demand a discount to acquire an asset that
cannot be liquidated immediately
• An existing owner will be willing to discount the asset only to the
extent of the anticipated loss of value during the liquidation period
30
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Mean Liquidation Period: Small Firms
Mean Liquidation Period ( Months) for Small Firms
0
50
100
150
200
250
MLP
31
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Mean Liquidation Period: Large Firms
Mean Liquidation Period(Months) for Large Firms
0
20
40
60
80
100
120
140
Time
Liq
uid
ati
on
Pe
rio
d (
Mo
nth
s)
MLP
32
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Price Pressure• Bid-ask spread
• Listing price (ask)
• Selling price (bid)
• Liquidity can be stimulated by applying price pressure
• Selling pressure results in lower bid price
• Buying demand results in higher ask price
33
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Market Failure• Frequently the price impact particularly for small firms or large
blocks of large firms, is severe enough to result in a market failure
• Sellers are not willing to sell at the offered low bid price
• Buyers are not willing to buy at the high ask price
• In such cases an orderly liquidation or dribble out is appropriate
• Market failure is not a concept in appraisals because we have to
state a given value on a specific date (there are no reserve bids)
34
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Price Risk• Orderly liquidation exposes the holder to price risk
• Longer liquidation period for volatile assets creates loss of ability
to sell at favorable prices
• Regulatory restraints (e.g.,Reg. 144) can require long liquidation
periods
35
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Marketability Discount Marketability Discount ApproachesApproaches
36
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Marketability Discount ApproachesEmpirical Studies
• IPO studies
• Restricted stock studies
Theoretical/Quantitative Models:
• Mercer’s QMDM Model
• (Adaptation of Discounted Cash Flow model incorporating an
assumed liquidity horizon)
Option Pricing Models:
• Black Scholes Put option
• Look back Put option
37
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Empirical StudiesIPO Studies:
• New issue hype
• Data based on insider transactions
• Unpublished studies with noisy data
• Does not address liquidity, only marketability
• Lack of adequate analysis in the valuation report
Restricted Stock Studies:
• Limited and defined holding period
• Established public market
• Transparent financial disclosure
• May or may not address liquidity
38
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Quantitative Marketability Discount Model• Discounted Cash Flow model
• Depends on holding period
• Required rate of return
• Growth rate
• Assumptions influence results
39
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Is Bajaj Right?• Marketability or liquidity?
• Pricing marketability assuming liquidity
40
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Put Option Based Models• Black-Scholes Put
• Factors
• Time to maturity
• Variance of returns
• Risk-free rate
• Exercise Price
• Asset price
41
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Look Back PutMeasures price risk during period of liquidation
• Ultimate no regret contract
• Estimation requires two parameters
• Liquidation period
• Volatility
42
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Issues for ConsiderationIssues for Consideration
43
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Issues for Consideration• Two components of the discount
• DLOM: the cost of going public
• DLOL: the cost of illiquidity (blockage)
• Liquidation period
• Price risk
44
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Abbott Index: Cost of IPO and DLOL
Discount for lack of liquidity
Cost of IPO(Discount for lack of marketability)
Discount for lack of marketability
& liquidity
45
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Marketability: Cost of IPOIdentify determinants of IPO cost (based on the characteristics of the
subject firm):
• Size of the firm
• Size of the block
• Capital market conditions/liquidity/capacity of market to absorb
46
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Qualitative Costs of an IPO• The IPO is a costly and risky approaches to raising capital
• Significant expenses are incurred with no assurance that the IPO
will be successful
• It is not uncommon for changing market conditions to cause
underwriters to cancel the IPO at the eleventh hour
• Insiders/affiliates are subject to significant holding period
requirements under SEC Rule 144 and/or underwriter restrictions
• Insiders/affiliates are subject to significant trading restrictions
based on SEC/company restrictions on trading during blackout time
periods
47
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Reported Costs of an IPO
SDC Platinum IPO data (1993-2003) used to estimate the cost of
going public:
• Large sample size analyzed - 7,824 IPO’s
• IPO costs documented as
Accounting fees and expenses:
• Legal fees and expenses
• Underwriting fees
• Financial advisor fees
48
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
IPO Sample ResultsIPO costs observed (as a percentage of IPO proceeds):
• 6.05% Trimmed mean
• 6.00% Trimmed median
• 0.42% Trimmed minimum
• 11.20% Trimmed maximum
• 1.79% Standard deviation
49
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
IPO Costs: Explanatory Factors • IPO costs, as a percentage of the offering proceeds, decline with
increasing values for:
• Issuing firm size
• Total offering size
• Percentage Firm ownership offered in IPO
• Observed market liquidity
50
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Regression Results: IPO CostsPercentage Cost of IPO:
• 4.305% + variable based on total market capitalization rank
• Analysis is broken into deciles based on total market
capitalization
Total market capitalization variables:
• 5.663% - total market capitalization rank = 0)
• 4.898% - total market capitalization rank = 1)
• 3.769% - total market capitalization rank = 2)
• 3.051% - total market capitalization rank = 3)
• 2.695% - total market capitalization rank = 4)
• 2.453% - total market capitalization rank = 5)
51
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Regression Results: IPO CostsTotal market capitalization variables (continued):
• 2.083% - total market capitalization rank = 6)
• 1.677% - total market capitalization rank = 7)
• 1.100% - total market capitalization rank = 8)
• 0.000% - total market capitalization rank = 9)
Other variables:
• -3.311% x market liquidity for capitalization size category =
• -0.00593 x percentage of firm offered
• -0.00014 x amount of offering in millions of dollars
52
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Average Market Capitalization for Decile Rankings
• Rank 0 = $17.7 million
• Rank 1 = $48.7 million
• Rank 2 = $100.0 million
• Rank 3 = $153.0 million
• Rank 4 = $247.7 million
• Rank 5 = $412.6 million
• Rank 6 = $717.0 million
• Rank 7 = $1,295.5 million
• Rank 8 = $2,837.8 million
• Rank 9 = $22,856.2 million
53
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Cost of IPO: Example• Total PTEV of equity of company is $180 million
• Subject block is 25% of total outstanding shares
• $45 million in PTEV
• Market capitalization decile is rank 3
• Market liquidity for capital size category 3 = 0.0656
• Cost of IPO equation:
4.305% + 3.051% + (-3.311% x 0.0656) +
(-0.00593 x 25.0%) + (-0.00014 x 45) = 6.795%
• Total discount for lack of marketability = 6.795%
54
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Cost of Liquidity: Cost of Liquidity: Discount for Lack of Discount for Lack of LiquidityLiquidity
55
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Cost of Liquidity: Discount for Lack Of Liquidity
• Identify determinants of liquidity (based on the characteristics of
the appropriate publicly traded guideline companies):
• Stock trading volume
• Stock price volatility
• Estimated liquidation holding period (a function of trading
volume and price volatility)
• Develop an objective and statistically supportable metric for
estimating risk exposure and the liquidation holding period
56
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Longstaff Look Back PutLongstaff 1995
57
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Block Size and DLOL
Discount for Lack of Liquidity
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Time
Dis
co
un
t P
erc
en
tag
e
Block 5%
Block 10%
Block 20%
58
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Large-Firm DLOL EstimationDiscount for Lack of Liquidity for Large Firms
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Time
Dis
co
un
t P
erc
en
tag
e
5% Block
10% Block
20% Block
59
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Small Firm DLOL EstimationDiscount for Lack of Liquidity for Small Firms
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Time
Dis
cou
nt
Per
cen
tag
e
5% Block
10% Block
20% Block
60
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Applying the TheoriesApplying the Theories
61
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Applying the Theories• One size does not fit all
• Blanket approaches using historical averages are not sustainable
• Case-specific analysis needed
62
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Tax Cases Phase I• Estate of Berg v. Commissioner
• Mandelbaum v. Commissioner
• Barnes v. Commissioner
• Estate of Davis v. Commissioner
• Furman v. Commissioner
• Estate of Hendrickson v. Commissioner
• Estate of Weinberg v. Commissioner
• Knight v. Commissioner
63
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Tax Cases Phase II• Gross v. Commissioner
• Lappo v. Commissioner
• McCord v. Commissioner
• Okerlund v. United States
• Peracchio v. Commissioner
• Thompson, Estate of Josephine, v. Commissioner
• Temple v. United States 2006
64
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Where Do We Go From Here?• Develop testable models
• Empirically validate models
• Apply these models to case-specific situations
65
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Questions?• Email tc-questions@bvresources.com at any time during the
Teleconference
• The conference operator will provide instructions on how to ask live
questions
66
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
Thank You for Attending!• Visit www.bvresources.com/conferences for a schedule of exciting upcoming
sessions, as always, Teleconferences are good for two CPE credits
• May 2nd, 409a Compliance featuring Bob Duffy, Scott Beauchene and Joel Johnson
• May 23rd, Playing and Prospering By the New Valuation Rules featuring Al King and Matt Crow
• May 24th, Overview of Buy-Sell Agreements (part 1 of 3) featuring Chris Mercer
• May 31st, Lost Profit Damages featuring Nancy Fannon, Robert Gray and Thomas Burrage
• June 14th, Application of Buy-Sell Agreements (part 2 of 3) featuring Chris Mercer
• June 26th, Recruiting in the BV Profession featuring Jim Alerding, Megan Nail and Ron Seigneur
• June 28th, ESOP Valuation featuring moderator Robert Reilly
• July 19th, Buy-Sell Agreements and Valuation Related Issues (part 3 of 3) featuring Chris Mercer
• July 25th, Electronic Discovery featuring Ron Seigneur, Melinda Harper and Shari Lutz
67
Business Valuation Resources Teleconference April 25th, 2007 – Defining, Measuring & Defending Discounts for Lack of
Liquidity
CPE Credits• All BVR Teleconferences are worth two interactive CPE credits
• Be sure to complete the post-conference survey within five
business days: http://www.bvresources.com/defaulttextonly.asp?
f=tcsurvey042507
• You should receive your CPE certificate via email within one week
Business Valuation Resources
1000 SW Broadway, Ste. 1200, Portland, OR 97205
1-888-BUS-VALU (287-8258) / Fax: 503-291-7955
www.bvresources.com
info@bvresources.com
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