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Business Valuation and Federal Taxes: Procedure, Law and Perspective, 2nd Edition by Shannon P. Pratt, David Laro

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Chapter 20

Discounts for Lack of Marketability1

Summary: General Introduction to Shareholder-Level Discounts and Premiums

Valuation discounts and/or premiums are meaningless unless the base to which they are applied is defined. It is therefore necessary to define what level of value is indicated by the results of the income, market, and/or asset approach(es).

The approaches discussed in Chapters 15, 16, and 17 generally produce one of the following two levels of value:

1. Control

2. Marketable minority

The income approach can produce either a control or a minority value. The key to which value is indicated is whether the numerators (cash flows, earnings, etc.) represent amounts that a control owner could be expected to produce by results from business as usual. If a minority value is indicated, it would be considered marketable because the discount rates and capitalization rates used in the income approach are based on publicly traded stock data.

In the guideline public company method, the guideline companies are, by definition, minority interests. Therefore, if valuing a minority interest, a minority interest discount normally would not be appropriate, but a discount for lack of marketability would be, because the publicly traded stock can be sold immediately and the proceeds received in three business days, while the privately held stock enjoys no such liquid market. However, as discussed in Chapter 19, minority shares of publicly traded companies may sell at their control ...

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