Benchmark study approach

This approach estimates the appropriate DLOM based on restricted stock studies, as well as pre-Initial Public Offering (IPO) pricing studies. The Carta valuation considers the pre-IPO pricing studies a generally less-accurate indicator of private company DLOM for smaller, earlier-stage companies, thus only an overview of the restricted stock studies is provided below.

Restricted Stock Studies

Restricted stock - unregistered common stock of a corporation identical in every respect to its publicly traded shares, except that it has not been registered, and is therefore, not freely tradable (source 4).

Valuators consider restricted stock studies because the effect of lack of marketability, one could argue, can be quantified by comparing the sale price of publicly traded shares to the sale price of so-called restricted shares of the same company that are identical in all rights and powers except for their ability to be freely marketed. Restricted stock studies are published, empirical studies, the most often cited of which are indicated below:

	Restricted Stock Studies Attempting to Measure the DLOM for Private Firms
Empirical Study	Time Period Covered	Mean DLOM
SEC overall average (source a)	Jan, 1966 - Jan, 1969	25.8%
SEC nonreporting OTC companies (source a)	Jan, 1966 - Jan, 1969	32.6%
Gelman (source b)	Jan, 1968 - Dec, 1970	33.0%
Trout (source c)	Jan, 1968 - Dec, 1972	33.5%
Moroney (source d)	Jan, 1969 - Dec, 1972	35.6%
Maher (source e)	Jan, 1969 - Dec, 1973	35.4%
Standard Research Consultants (source f)	Oct, 1978 - Jun, 1982	45.0% (median)
Willamette Management Associates (source g)	1981 - 1984	31.2% (median)
Silber (source h)	Jan, 1981 - Dec, 1988	33.8%
FMV Opinions, Inc. (source i)	Jan, 1979 - Apr, 1992	23.0%
Management Planning, Inc. (source j)	Jan, 1980 - Dec, 1996	27.1%
Bruce Johnson Study (source k)	Jan, 1991 - Dec, 1995	20.0%
Columbia Financial Advisors (source l)	Jan, 1996 - Apr, 1997	21.0%
Columbia Financial Advisors (source l)	May, 1997 - Dec, 1998	13.0%

Sources:

(a) Discounts Involved in Purchases of Common Stock (1966-1969), Institutional Investor Study Report of the Securities and Exchange Commission, H.R. Do. No. 92-64, Part 5, 92nd Congress, 1st Session, 1971, 2444- 2456.

(b) Gelman, Milton, An Economist Financial Analyst’s Approach to Valuing Stock of a Closely Held Company, Journal of Taxation, June 1972, 353-354.

(c) Trout, Robert R., Estimation of the Discount Associated with the Transfer of Restricted Securities, Taxes, June 1997, 381-384.

(d) Moroney, Robert E., Most Courts Overvalue Closely Held Stocks, Taxes, March 1993, 144-154.

(e) Maher, Michael J., Discounts for Lack-of-marketability for Closely Held Business Interests, Taxes, September 1976, 562-71.

(f) Pittock, William F., and Stryker, Charles H., Revenue Ruling 77-287 Revisited, SRC Quarterly Reports, Spring 1983.

(g) Willamette Management Associates study (unpublished)

(h) Silber, William L., Discounts on Restricted Stock: The Impact of Illiquidity on Stock Prices, Financial Analysts Journal, July-August 1991, 60-64.

(i) Hall, Lance S., and Timothy C . Polacek, “Strategies for Obtaining the Largest Valuation Discounts,” Estate Planning, January/February 1994. pp. 38-44.

(j) Oliver, Robert P. and Roy H Meyers, “Discounts Seen in Private Placements of Restricted Stock: The Management Planning, Inc., Long-Term Study (1980-1996)” (Chapter 5) in Robert F, Reilly and Robert P. Schweihs, eds, The Handbook of Advanced Business Valuations (New York: McGraw-Hill, 2000).

(k) Johnson, Bruce, "Restricted Stock Discounts, 1991-95", Shannon Pratt’s Business Valuation Update, Vol. 5, No. 3, March 1999, pp. 1-3. “Quantitative Support for Discounts for Lack of Marketability.” Business Valuation Review, December, 1999, pp. 152- 155.

(l) (CFAI Study, Aschwald, Kathryn F., "Restricted Stock Discounts Decline as Result of 1-Year Holding Period – Studies After 1990 'No Longer Relevant' for Lack of Marketability Discounts", SHANNON PRATT'S BUSINESS VALUATION UPDATE, Vol. 6, No. 5, May 2000, pp. 1-5.

What is the Discount for Lack of Marketability (DLOM)?