BUSINESS VALUATION Concepts                                                            Issue #1                     1/2005

BUSINESS VALUATION Concepts is a publication from the BUSINESS VALUATION & LITIGATION SUPPORT Department of Jones & Roth, P.C. offering a series of brief pointers (elementary to advanced) dedicated to provide insight into the “rocket science” of BV.

MARKETABILITY DISCOUNT, TO APPLY OR NOT TO APPLY

Have you seen your appraiser or the other side’s appraiser provide a detailed appraisal in which there was significant concern for minute changes in levels of revenues and expenses and then, after explaining the detail analysis, apply a 35% to 40% discount to the value for lack of marketability?  And the explanation given is covered in a couple of paragraphs with citations to a few studies.  Was it appropriate?  What’s the current opinion of the Court of Appeals of the State of Oregon?

A lack of marketability discount addresses the degree of liquidity inherent in any asset held when compared to the value of a comparable but fully liquid asset.  Full liquidity is defined as cash or the ability to convert an asset into cash within three days.  Liquidity is valuable.  If an opinion of value of the appraised asset is developed by comparing that asset with a fully liquid asset, then the difference in liquidity between the target asset and the comparable asset must be determined.  This difference in value reflects the marketability discount.  This discount is applied regularly when valuing a non-controlling interest in a business.  Should it be applied when valuing controlling interest, or 100% ownership, in a business?

In Hanson v. Hanson (No. A114572 Or. App. March 10, 2004) the Oregon Court of Appeals affirmed our analysis.  In general, a lack of marketability discount, when valuing a controlling interest, is not appropriate.  Yes, there was a caveat.  If the controlling interest value was developed by referencing a fully liquid value, a marketability discount would be appropriate.  This, however, is rarely the case.  The argument presented to the trial court by valuation expert William Mason, shareholder at Jones & Roth, P.C., was affirmed.

The danger of not understanding when to apply it, how to apply it, and the magnitude of the discount, could cost your client 40% or more on the value of a closely held business interest.  We would be pleased to consult on this issue or any other business valuation related issues.

Jones & Roth, P.C. is one of Oregon’s largest consulting and CPA firms, serving you from offices in Lane, Deschutes and Washington Counties.  Our BV and litigation support team has a combined experience of more than 40 years.  Bill Mason has been providing this expertise for more than 25 years.  All members of our team are credentialed.