Prevailing business valuation standards agree on the following:
- The base value (pre-adjustment value) to which a marketability discount is applied must be defined and specified.
- The reasons for any concluded marketability discount must be enumerated.
- The data or empirical evidence relied upon in reaching a conclusion regarding a marketability discount must be identified and it must be relevant and reliable.
- Methods for developing marketability discounts under the market approach should follow guidance found in the Business Valuation Standards of the American Society of Appraisers (ASABVS) and in the AICPA’s Statement on Standards for Valuation Services (SSVS)-1 (and other standards, as well).
- Methods for developing marketability discounts under the income approach should follow guidance found in ASABVS and SSVS-1 (and other standards, as well).
- In general, many appraisers and users of valuation reports are not aware of the degree to which prevailing business valuation standards call for analysis and consideration in the development of DLOMs.
The next posts in this series on understanding the largest valuation discount will examine the IRS DLOM Job Aid.
From this examination, we will identify the “factors influencing marketability” that are discussed in the aid and use those factors, together with the review of business valuation standards, to develop as comprehensive list of factors influencing marketability as possible.
The IRS DLOM Job Aid also provides a list of valuation methods that are frequently employed by appraisers. We will use that list as the base list for discussing individual valuation methods in this series. Relevant questions will include:
- Does this valuation method appear to comply with relevant business valuation standards?
- Does this valuation method enable us to consider the various factors influencing marketability?
- Does this valuation method enable appraisers to develop marketability discounts such that the conclusions can be tested for reasonableness?