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Discounts for Lack of Marketability
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| 2.6.3 Discounts for Lack of Marketability Recall that, Marketability is defined as the ability to convert the investment to cash very quickly at minimal costs, and with a high degree of certainty of realizing the anticipated amount of proceeds Specifically, marketability relates to the liquidity of an investment relative to a comparable and actively‐traded alternative. As discussed in Section 2.2 Fair Market Value, liquidity is referred to as the ability to convert a subject interest to cash or a cash equivalent. Taking the current equities market as an example, in general, an equity position in a publicly traded company can be sold and converted to cash in approximately three days. The phrase used most prevalently to describe this degree of marketability is as if publicly traded The term marketability is generally used interchangeably with the phrase as if publicly traded In essence, impairment of liquidity (converting an interest in a closely‐held company to cash or a cash equivalent in three days) Increases an investor’s expected rate of return because it either Increases the holding period of the investment, the cost to convert the investment to cash (or its equivalent) or both. As a result, the market‐clearing price of anon marketable security is discounted relative to the marketable value. The discount is generally expressed as a percent Page 28 of 141 of a marketable value and also referred to as a discount for lack of marketability or a “DLOM”). There is no public market nor is there a secondary market for closely‐held companies or their related interests. The inability to readily sell an interest Increases the owner’s (or potential owners) exposure to changing market conditions and Increases their risk of ownership, or, said from another perspective, it decreases the value of their investment. Accordingly, a hypothetical buyer would typically demand a higher rate of return (through a lower price) in comparison to similar but publicly traded interests, causing the privately‐held interest to trade at values less (i.e., at a discount) than if they were publicly traded. The Increase in return and corresponding reduction in value (i.e., a DLOM) to compensate for lack of marketability is based on the particular facts and circumstances that affect the interest being evaluated. Factors that would contribute to a need fora DLOM Include, but are not limited to Download 0.84 Mb. Share with your friends:
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