Advanced Valuation Skills - Discounts & premiums modules
We have just carried out the perfect valuation (well not quite), and then we deduct a magic DLOM discount figure of 30%, before adding on a control premium of 15%.
Most valuation disputes stem from disagreements over either the existence or the quantification of discounts and premiums, and in practice there are very few, if any, fixed percentages we can lock on to. Like a GPS navigation system, the existence and quantification of discounts and premiums depend essentially on our location at the beginning of the journey, and so it is just as important to understand our starting point as our journey's end.
We start with the traditional 3 Levels of Value model and expand it into an overarching Cycle of Value (see below or download at the bottom of this page). This allows us to split enterprise -level adjustments (GPRS - growth, performance, risk and size) from owenrship adjustments such as the acquisition premium (control premium plus strategic premium), DLOM, DLOL and minority discounts. The Cycle of Value can be used to navigate within and between the CoCo, CoTrans and income models, and to make use of a larger number of research studies, some of which do not sit easily in the simple 3 Levels of Value model.
TS Eliot's lines in Little Gidding have always seemed particularly apposite in the context of discounts and premiums: "We shall not cease from exploration, and the end of all our exploring will be to arrive where we started, and know the place for the first time."
- Levels of value
- Market anchor model
- DLOMs and DLOLs
- Minority discounts (including the close company minority discount (CCMD)
- Review of studies
- Minority interest studies in public firms (restricted stock studies, pre-IPO studies, event studies, public shares in PE fund studies, and LEAPS studies)
- Controlling interest studies (matched pair studies)
- Minority interest studies in closely held firms (including PE secondary market studies and the Pepperdine capital markets project)
- Option and CAPM models (Chaffe, Longstaff, Finnerty, Meulbroek and Tabak)
- Practitioner methods (including the Mercer, Abrams, Stockdale, Butler Pinkerton and NICE models)
- Comparative factor analysis (including Mandelbaum)
- Review of studies
- Daubert challenge