Discount Valuations

Asset ownership is effectively the ownership of a bundle or rights in that asset.  These rights can be statutory, contractual, or economic.  In other words, one can either have total control in these assets, in which one owns 100% or all of the various bundle of rights, or something less.

Typically, in the case of a business, one can have unilateral control to make all decisions and manage the company or one can have a minority interest which lacks such unilateral control.  Similarly, in real estate, one can have total control (a fee simple interest), or something less such as: an interest subject to a lease (leased fee), a leasehold interest, an interest subject to an easement, an interest impaired by down zoning, an undivided partial interest in real estate, etc.  When an asset owned is something less than its full bundle or rights, that partial or minority interest is impaired and is subject to a discount from its control value.  In businesses and undivided partial interests in real estate the discount attributable to a minority interest is often more than its proportionate value to reflect the impairment due to the loss of those rights.

Concurrently, there are marketability and liquidity issues to an asset.  For example, an interest in a privately held company, when compared to a public company listed on the stock exchange, is less liquid than its public company counterpart.  This impaired marketability gives rise to a discount for lack of marketability, because the asset owner cannot immediately liquidate for cash or find a buyer for that asset.  Consequently, the seller of the asset suffers a present value loss over the time it takes to liquidate or sell the asset and receive its cash equivalent relative to a public company.

There are a variety of situations which call for discounting an asset to reflect its impairment due to loss of full control, lack of marketability, contractual or economic restrictions.  Having valued and applied discounts or premiums to thousands of different assets, Accredited Business Appraisals is fully conversant in all discount situations, and can provide discount opinions that are thoroughly researched, well reasoned and supported with empirical data.  Examples of a few situations to which discounting applies are:

  • Minority Interest Discounts
  • Lack of Marketability Discounts
  • Restricted Stock Discounts
  • Initial Public Offering Discounts
  • Longstaff Model Discounts
  • Key Person Discounts
  • Voting vs. Non-voting Share Discounts
  • Blockage and Absorption Discounts
  • Family Limited Partnership and Limited Liability Interest Discounts
  • Undivided Partial Interests in Real Estate, Art and other Tangible Asset Discounts
  • Tenancy in Common Interest Discounts
  • Built-in Capital Gains Discounts
  • Portfolio or Over-Diversification Discounts
  • Contingent Liability Discounts
  • Accredited Business Appraisals maintains a proprietary data base of over 100 transactions of undivided partial interests in real estate for support of its valuation conclusions.