firm value and marketability discounts - new york university.pdf

Firm Value and Marketability Discounts * ** *** Mukesh Bajaj , David J. Denis , Stephen P. Ferris **** Atulya Sarin I. INTRODUCTION The issue of valuation is a continuing one in legal literature since it resides at the heart of many controversies.1 Valuation of securities of a closely held company, for which there is no ready market, is particularly challenging. For example, such valuation is critical in cases in which minority dissenting shareholders to a merger demand an appraisal remedy, or when a gift ownership interest in a partnership, a limited liability company, or a closely held company must be valued for tax purposes. In general, investors value marketability. Therefore, other things being equal, investors will pay more for an asset that is readily marketable than for an otherwise identical asset that is not readily marketable. The usual valuation methodologies, which utilize cash flows or market transactions, do not explicitly account for the marketability of an asset. Hence, in order to value an asset that is not marketable, the usual approach is to value the asset as if it were marketable, then apply a marketability discount to this estimated value.2 The challenge in valuing non-marketable assets lies in determining the appropriate discount to be applied in a given situation. * Managing Director of Finance and Damages Practice of LECG, LLC, which is an international consulting fir