How do you communicate the marketability discount to your clients or stakeholders?

Explain Need: Clarify why marketability discounts matter—highlighting the impact on value. Show Comparisons: Use examples or data from similar cases to illustrate how these discounts affect prices. For instance, if you're discussing the valuation of a private company with stakeholders, you might compare the value with and without marketability discounts to show how potential buyers might adjust their offers due to the company's limited marketability. This helps them understand the impact on the final sale price.

When discussing the concept of marketability discount with clients or stakeholders, it's crucial to frame it in a manner that aligns with their objectives and understanding of market dynamics. One effective approach is to illustrate how marketability discount reflects the difference in perceived value between an illiquid asset and its liquid counterpart. This can be exemplified through case studies or real-life scenarios to demonstrate the impact on investment decisions or business valuations. By emphasizing the rationale behind marketability discount and its implications on overall asset evaluation, we can foster informed discussions and enhance decision-making processes for all involved parties.

As a part of the valuation exercise, we need to check the market sentiments of the sector on each valuation date, hence practically in valuation of a private company we usually check how the multiples of comparable companies in the sector have moved between two valuation date (Also taking into account our performance vs that of peers) and basis that we can justify the discount/premium to the client

Marketability discount is often utilized in private company valuation. Besides marketability, there are also a myriad of other documented discounts (lack of control, key person risks, corporate form, uncertainty, etc.). In my opinion, the most important to ask when applying any kind of discount is to understand the context of valuation (basis of value, who the buyers and sellers are, purpose of valuation, etc.). For instance, a strategic buyer who don't intend to sell the asset should not care about this discount while a financial buyer should absolutely consider it. Being aware of the arguments for and against each type of discount will guide your application of them.

In my view, for robust private company valuation, consider market sentiment Beyond just comparable multiples. We shld rather analyze sector trends, relative performance, and broader economic factors. This multi-pronged approach justifies valuation adjustments (discounts or premiums) based on the company's unique position and market perception.

Try to choose the method accordingly to your subject company and its foreseeable future. For example, if a public exit is possible in the next 5 years, if there are different class of stocks, an investor would have a better understanding of the pre-IPO of stock restriction studies. If it is expected to have remain on the private market, a study on venture capital rate of returns vs public returns might be more suitable.

We can't really talk about the DLOM without also considering potential DLOC, as it relates to private companies. This is because for shares in a private companies, investors often face challenges in both trading their shares freely and exerting control over the company. When considering these two discounts together, note that they should be multiplicative in nature. I.e., the correct formula for the total discount should be "1 – (1 – DLOM)(1 – DLOC)". This is because the two discounts are interdependent. If we apply the discounts separately, we would be overshooting the discount. For DLOM specifically, common estimation approaches include pre-IPO stock sales, restricted stock transactions, and put option costs as a % of stock prices.

I would not compare a marketability discount to a discount for buying in bulk. You save money and benefit from buying in bulk A discount for lack of marketabilty reflects a reduction in value of an asset in the absence of an active market to sell it. The former is considered to be a positive, while the latter is perceived to be a negative. People understand that selling a publicly traded stock is as easy as pushing a button while selling shares of their privately held company can’t be sold the same way.