Graziadio Working Paper Series


Discounts for Lack of Marketability: Are Business Appraisers Discounting the Discounts?

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We set out to understand the size of DLOMs by comparing the subject of the discounts, privately held companies, to the bases from which discounts should be applied. These relevant bases include publicly traded firms considered as guideline public companies and public market benchmarks from which cost of capital data are obtained. We created a database of 1,328 matched pairs and 9,765 matched industry pairs using transactions from 1995 to 2008. Our results indicate that entity-level discounts average between 68 and 70 percent, which are significantly larger than those reported in other databases and from other studies. We believe one of the main reasons our discounts are larger is because we captured, from privately held company transactions data, the actual value associated with the expected probability of a public market liquidity event. In other words, a matched pairs approach allowed us to calculate the discounted value associated with the expected probability of private firms becoming public firms at some point in the future.