Page 43 - Business Valuation for Estates & Gift Taxes

The pre-IPO studies indicated a higher average discount than the results suggested by the restricted
stock studies. This difference was attributed to the fact that the pre-public offering transactions occurred
when there was not yet any established secondary market for the subject stock. This is similar to an in-
terest in a closely held company, which has, at best, a limited secondary market. Unlike the companies
in the pre-IPO studies, closely held companies generally have no near-term public offering or other
equivalent liquidity event on the horizon. This would indicate a higher discount for an interest in a close-
ly held company than those observed in these studies.

Many basic business valuation texts contain detailed information about these studies. fn 1 Readers should
refer to these texts for that detail and background.

In addition, there were several studies prepared and published during the period of the progressive re-
duction of the SEC Rule 144 holding period. These include two studies prepared by Columbia Financial
Advisors immediately before and after the reduction of the two-year term to one year, fn 2 two studies
prepared by Trugman Valuation Associates, fn 3 and one prepared by Stout, Risius, Ross. fn 4 A sequen-
tial review of the studies as the SEC Rule 144 restriction period dropped from two years to one year in
1997 and to six months (on February 15, 2008) shows a general decline in the level of observed dis-
counts, from levels in excess of 30 percent when the two-year holding period was in effect, to an aver-
age of 10.9 percent and median of 9.3 percent for the Stout, Risius, Ross study covering the years 2005–
2010.

Each study noted had previously tested a population that had attained (or, in the case of the pre-IPO
studies, would soon attain) access to the public markets.

These studies also shared the following attributes:

 Each company had already grown, or was expected to grow, to sufficient size to generate interest
in ownership from the public.

 Each company had been, or was expected to become, profitable, with the benefits of those profits
being distributed fairly among various stakeholders based exclusively on their respective legal
claims.

fn 1 Commonly referenced valuation texts are as follows: (1) Shannon P. Pratt and Alina Niculta, Valuing a Business: The Analysis
and Appraisal of Closely Held Companies—Fifth Edition (New York: McGraw-Hill, 2008) pages 415–440; (2) James Hitchner, Fi-
nancial Valuation: Application and Models—Third Edition (Hoboken, NJ: John Wiley & Sons, 2011) pages 411–415; (3) Gary R.
Trugman, Understanding Business Valuation, Fourth Edition (New York: American Institute of Certified Public Accountants, 2008)
pages 415–423; and (4) Z. Christopher Mercer, Quantifying Marketability Discounts (Memphis: Peabody Publishing, LP, 1997) pages
37–91; 345–364.

fn 2 Kathryn F. Aschwald, "Restricted Stock Discounts Decline as a Result of 1-Year Holding Period," Shannon Pratt’s Business Val-
uation Update (May 2001) quoted in Pratt, Shannon, P., Business Valuation Discounts and Premiums (New York: John Wiley &
Sons, 2001) page 109.

fn 3
William Harris, "Trugman Valuation Associates, Inc. (TVA) Restricted Stock Study," Business Valuation Review, Vol. 28, No.3,
pages 128–139 and Vol. 30, No.4, pages 132–139.
fn 4
Aaron M. Stumpf, Robert Martinez, and Christopher T. Stallman, "The Stout Risius Ross Restricted Stock Study: A Recent Ex-
amination of Private Placement Transactions from September 2005 through May 2010," Business Valuation Review, Vol. 30, No. 1,
pages 7–19.

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