What are the common sources of data and benchmarks for liquidity and marketability discounts?

Valuing a private stake? It's worth less than a public one because it's harder to sell quickly. Here's why: Compare similar public companies: Look at their trading price vs. their net asset value to see the discount. Industry data: Reports and investment banks offer average discounts for specific industries. Valuation guides (My Favs & Most Imp): Textbooks and software suggest general discount ranges based on asset type. Remember, in my humble opinion smaller stakes (like 20%) face bigger discounts than controlling interests.

Example: Stock that is traded on a major exchange like the NYSE is both liquid and marketable, it can be sold quickly and at a fair price in a large and active market. However, a piece of real estate may be less liquid and marketable, because it may take a long time to find a buyer and negotiate a price, and the market conditions may vary depending on the location and demand. Liquidity and marketability are important for investors, because they affect their ability to access their money when they need it, and to sell their assets at a fair price. Generally, liquid and marketable assets are preferred by investors who need more flexibility and security, while less liquid and marketable assets may offer higher returns but also higher risks.

When considering liquidity and marketability discounts, it's essential to leverage a variety of data sources and benchmarks. Common avenues include examining historical transaction data within the relevant industry or market, analyzing comparable companies' financial performance and market activity, consulting industry reports and publications for insights on prevailing market conditions, and engaging with valuation professionals or experts who specialize in assessing these discounts. By utilizing a comprehensive approach to gathering data and benchmarks, professionals can make more informed decisions and effectively navigate the complexities of liquidity and marketability considerations.

For the marketability discounts for the African market (South, West and East Africa), the PWC Africa Valuation Methodology Survey - 10th Edition application is handy

Liquidity and marketability discounts often rely on different data sources and benchmarks. For liquidity discounts, data typically comes from studies of restricted stock transactions and private placements, reflecting the ease of converting assets to cash without significant value loss. In contrast, marketability discounts are derived from empirical studies of the price differences between public and private market transactions, considering the time, cost, and effort required to sell an asset. Understanding the distinction is crucial as liquidity reflects asset convertibility, while marketability accounts for the time and effort to find a buyer.

Different industries exhibit varying levels of liquidity and marketability based on their unique characteristics and market conditions. For instance, technology companies may experience higher marketability discounts due to rapid innovation cycles and competitive pressures, while established manufacturing firms may have more stable valuations.

For liquidity and marketability discounts, common data sources and benchmarks include: 1. Empirical Studies: Studies like those by the SEC, Pratt’s Stats, or Stout’s restricted stock studies provide benchmarks based on historical transactions. 2. Private Equity and Venture Capital: Data from these sectors offer insights into the illiquidity discounts applied to private company investments. 3. Public vs. Private Market Comparisons: Comparing the marketability of public vs. private company shares helps to determine appropriate discounts.

To calculate DLOM, valuers can refer to the Mandelbaum Factors. Regulatory and professional body standards (i.e., RICS Red Book and US IRS) provide a number of acceptable approaches ranging from pre-IPO studies of stock performance to the costs of going public and using option pricing methodology. Benchmarks for DLOL can range massively, because they are dependent on the markets that exist for the asset and the size of the shareholding that needs to be sold. One method of particular interest is NBER’s calculation, which uses a Black Scholes option pricing model to measure the maximum impact of a number of liquidity restrictions. Whatever the case, application of DLOL & DLOM should fit the context of valuation.

Estimating liquidity and marketability discounts requires a thorough understanding of market conditions, company-specific factors, and empirical data. Professionals often rely on restricted stock studies and pre-IPO studies as benchmarks, which provide insight into the discounts applied in comparable situations. Data sources like FMV Opinions, Valuation Advisors, and comprehensive transaction databases are commonly used to derive these discounts. Additionally, factors such as holding period, volatility, and transaction costs are meticulously analyzed to refine discount estimates, ensuring they reflect the unique risks associated with the subject asset.

When assessing liquidity and marketability discounts, it's essential to rely on robust data sources and benchmarks. Pre-IPO studies are crucial as they compare private company valuations before an IPO with post-IPO prices, providing insights into marketability discounts. Restricted stock studies also offer valuable data by analyzing the discounts on restricted shares of publicly traded companies, which aids in determining liquidity discounts. Additionally, merger and acquisition databases like Mergerstat and Pitchbook provide transaction-level data, allowing for the comparison of assets under different liquidity conditions. These benchmarks enhance the credibility and accuracy of valuations.

The difference between the prices of publicly traded shares and private transactions of minority interests in similar companies can provide a benchmark for minority discounts. Databases of private transactions: Databases like Pratt's Stats, Bizcomps, or DealStats can offer comparable transactions to calculate the average or median minority discount for a target company. Research reports or databases offering insights into minority discounts across sectors can provide valuable benchmarks for comparison, especially when evaluating a minority stake in a specific industry. Analyses of historical data on the marketability and liquidity of minority interests in various industries and sectors can offer valuable insights into minority discounts.

Liquidity and marketability discounts represent the reduction in an asset’s value due to limited liquidity (difficulty in selling) and marketability (difficulty in transferring ownership). These discounts generally range from 10% to 30%, influenced by asset characteristics and market conditions. Reliable data sources include empirical research, professional valuation reports, and specialized databases such as FMV Opinions and Pluris DLOM Database.