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CORE insights

Timing and access is everything: making the case for discounts 

Discounts for lack of marketability represents valuation differences between publicly traded stocks, where a market for selling these securities exists, and privately held stocks, where there is no readily accessible market to trade.  Therefore, a willing buyer would demand, and a willing seller would acquiesce to a discount for the sale of securities of a privately held business given the lack of access to the capital markets

There are various studies that quantify the discounts for lack of marketability that are often used by appraisers to determine appropriate discounts to be applied when assessing fair market values of privately held securities; these studies are commonly referred to as “restricted stock” studies or “IPO” studies.

The restricted stock studies capture the differences between of publicly traded company’s stock and its restricted stock counterpart to arrive at a discount for the lack of marketability of the restricted stock. 

The IPO studies however captures price differences between shares sold pre-initial public offering over a period of time and post-IPO. The pre- and post-price differential represents the discounts for lack of marketability.

In today’s world, there are many businesses that are privately owned and managed across a range of industries.  These businesses are often owned and managed by families.  These businesses are often structured with various shareholders who either own minority interests or such interests reflect their nonmarketable nature by virtue of the governing documents, restricting their salability and transferability of these interests.  Such interests in closely held entities often pose unique challenges in determining their values.  

As such the hypothesis – supported by research and court cases – is as follows: investments where liquidity is quickly achievable is certainly worth more than investments where there is difficulty in selling  in a timely manner.  Many of these issues arise during gift and estate tax planning, estate, generation-skipping transfer tax, income tax, property tax and other taxation disputes. 

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