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Frequently Asked Questions

  1. Most people I talk to say the best way to estimate the discount is using restricted stock studies. Why should I use the Pluris DLOM Database instead?
    • The Pluris DLOM Database actually IS a restricted stock study, the difference being that the database is so vast (more than 3,000 transactions) that it allows you to do your own research and generate your own study instead of just relying on someone else's research, or an average discount.
  2. How is the discount calculated?
    • For each of the transactions, the amount paid for the restricted stock is compared with the trading price for the same shares (same ticker) in the public markets at that point in time. The discount is calculated as 1 minus the price paid for the restricted stock divided by the price paid for unrestricted stock. We believe this discount is a reflection of the lower degree of liquidity or marketability enjoyed by the buyer of the private placement.
  3. What kind of transactions are these?
    • Each transaction in the Pluris DLOM Database is a restricted stock private placement. The database has this in common with every other restricted stock study listed in the standard valuation textbooks (see, for example, Shannon Pratt's Valuing a Business, 5th Ed., p. 431). Such private placement transactions are also commonly referred to as private investments in public equity, and abbreviated, PIPEs.
  4. Why do you include transactions in the database where warrants are attached to the shares?
    • Only some of the transactions in the Pluris DLOM Database have warrants included. However, we believe, based on published research, that taking a sample of companies that are able to sell restricted stock without warrants attached would be a biased sample. The resulting discounts from such an analysis would be biased downward. We believe that this approach is inappropriate. Nevertheless, since the Pluris DLOM Database includes data on transactions both with and without warrants, analysts who want to generate the discount without those transactions can easily do so.
  5. I have heard that discounts for restricted stock are not reflective of the DLOM for private companies. Comment?
    • Yes and No. For the most typical, relatively small, private placement of restricted stock, the discount would tend to be lower than what you would apply to a private company. But these transactions are still useful to the business valuation expert. We call this discount the Restricted Stock Equivalent Discount (RSED). For the average RSED, we think it's appropriate to add an incremental discount for private companies to get to the "full" DLOM. We use our database to generate this increment as well(see below).
  6. Why would I calculate a warrant value then calculate a DLOM value off those calculations? The DLOM % doesn't seem real to me? Isn't it just a calculation of a calculation? Does the calculated RSED account for the inclusion of warrants?
    • It's innacurate to say that these are a calculation of a calculation. The discounts for all the transactions in the database are calculated as the difference in the price paid for the restricted stock purchased versus the price the same (but unrestricted) stock was trading for in the public market at the same time. However, if some of the money paid in the transactions was for warrants, then that part has to be deducted first. Luckily, there is secondary market trading indications for what these warrants are worth.
  7. What is the RSED?
    • RSED is an acronym for Restricted Stock Equivalent Discount. RSED was introduced as the fourth level of value in the early 2000's, and featured in articles and major publications (i.e. Shannon Pratt's Valuing a Business) as part of the new level of value of framework. The RSED represents an illiquid position that is not fully non-marketable (between marketable minority and non-marketable minority). At the RSED level, an analyst will compare and contrast the key risk characteristics of the subject company to the transactions contained in the Pluris DLOM Database. The comparative framework typically includes an analysis of key risk metrics (i.e. size, balance sheet risk, volatility, etc.), and primary and secondary Standard Industrial Code data sets. To arrive at a non-marketable minority interest of private held shares, an appraiser must make an additional illiquidity adjustment referred to as PEDI.
  8. What is the PEDI?
    • PEDI is an acronym for Private Equity Discount Increment. Since private placement transactions primarily reflect positions that are more liquid than privately held stock, a PEDI is the second step in the analysis for determining the lack of marketability associated with non-marketable minority interests. PEDI is determined by comparing the discounts associated with the largest block transactions (most illiquid) to the average and median discount indications of all the transactions. Underlying this methodology is the notion that transactions in the largest blocks serve as the best proxy for the lack of marketability of small blocks in privately held companies.
  9. What is the standard deviation, the median, and average discounts in the database?
    • Standard deviation = 0.303647
      Average = 22.4%
      Median = 20.8%
      NOTE: These figures are from 2001 - 2010
  10. To what extent has regression analysis been used on this data to determine if there truly are specific factors that influence the discount?
    • We have done significant regression analysis on the data to determine what factors influence the discount, some of which has been published. And we continue to explore indications from this research. As economic data, there is a significant natural variability in the discount. However, compared with other analyses, the Pluris DLOM Database stacks up very well in terms of statistical measures of "goodness of fit". However, for practical valuation work, we suggest to use other methods such as quintile analysis.
  11. What is a PIPE?
    • Private Investment in Public Equity. Refers to a form of growth capital investment made into a publicly traded company. PIPE investments are typically made in the form of equity or equity-linked security that is unregistered for a certain period of time.
  12. In the Database, what volume stocks are considered to be low volume stocks?
    • When the common stock has a daily dollar trading volume of less than $5,000 a day. This is calculated as: transaction date closing price * last one year average daily trading volume ( or applicable average daily trading volume)
  13. If the Pluris DLOM Database is better than Mandelbaum, where has it been used in court?
    • We don't suggest that the Pluris DLOM Database is 'better than Mandelbaum'. We do, however, suggest that valuators who need to develop a DLOM should, as the court itself did in Mandelbaum, use a restricted stock study as part of the research and analysis in developing a DLOM, including the so-called 'Mandelbaum factors'.
    • The Pluris DLOM Database is the restricted stock study created by the individual valuator using the database that will be a part of the valuation and could be used as evidence in court. In defending a DLOM, the valuator has the ability to cite the criteria that were used to select the transactions that make up the restricted stock study and why those particular criteria were selected. When a source is cited in a court case, it is typically to justify some value derived from that source, such as a market multiple obtained from BIZCOMPS®, or a control premium from MergerStat. When a valuator uses the Pluris DLOM Database, they do not have to rely on an 'average' or 'median' DLOM derived from someone else's study. Instead, they have all the comparative criteria that caused them to use the particular restricted stock transactions in developing their DLOM.
  14. Has the Pluris DLOM Database met the Daubert test?
    • The Pluris DLOM Database is not 'used in court'. Instead, it is the restricted stock study created by the individual valuator using the Database that will be a part of the valuation and could be used as evidence in court. In terms of Daubert tests, in the Gross case, the 6th Circuit Court of Appeals specifically addressed Daubert issues regarding Dr. Bajaj's 'novel' method of using his own restricted stock study in developing a DLOM in and found it met the Daubert tests. (Gross v. CIR, 272 F. 3d, 333 (2001)
  15. Can I search by SIC code?
    • Yes, the Database is searchable by 2-, 3-, and 4-digit SIC codes, as well as 16 other search parameters, including volatility, market capitalization, revenue, assets, and block size.
  16. Some authors say that SIC code doesn't have much to do with the amount of discount. How do I find relevant transactions with the Pluris DLOM Database?
    • Yes, authors such as Espen Robak (President of Pluris Valuation Advisors, the creators of the database) and Paul Heidt (BVR's Guide to Discounts for Lack of Marketability) have stressed that the financial risk of the issuing firm has more impact on the discount. If you wish to pursue this approach to developing your DLOM, the Pluris DLOM Database supports you with the ability to search on such factors recommended by these authors as block size, volatility and market-to-book ratio to select the transactions for your restricted stock study.
  17. How large is the database and what is the timeframe covered?
    • The Pluris DLOM Database currently includes over 3,000 transactions from 2001 to 2010 and is updated quarterly.
  18. How are the PEDI numbers calculated, that is, 1.3x to 1.5x and 6% to 10%?
    • The numbers are calculated from the data. Records with the very largest blocks relative to average volume contained larger discounts. These large blocks were analyzed and compared to the entire database.
Block Size (Qrtrs to Sell) Increment
Greater than 35 quarters Greater than 30 quarters Greater than 25 quarters All Data Multiplicative Additive
Mean 31% 30% 29% 23% 1.3x-1.4x 7-8%
Median  30% 26% 26% 20% 1.3x-1.5x 6-10%

Based on this analysis, multiplicative adjustments range from 1.3x (29%/23%) to 1.5x (30%/20%) and the additive adjustment range from 6% (26%-20%) to 10% (30%-20%). Remember though, the analyst has to do a thorough job and these numbers that apply to the entire data set may or may not apply to the specific fact pattern.

Based upon the above table, here is the math:

MULTIPLICATIVE
Mean Median Mean Median
(Mean of Qtrs >35) / Overall Mean (Median of Qtrs >35) / Overall Median 31%/23% = 1.35x 30%/20% = 1.50x
(Mean of Qtrs >30) / Overall Mean (Median of Qtrs >30) / Overall Median Thus 30%/23% = 1.30x 26%/20% = 1.30x
(Mean of Qtrs >25) / Overall Mean (Median of Qtrs >25) / Overall Median 29%/23% = 1.26x 26%/20% = 1.30x
Concluded Range: 1.3x - 1.5x
ADDITIVE
Mean Median Mean Median
(Mean of Qtrs >35) / Overall Mean (Median of Qtrs >35) / Overall Median 31%-23% = 8% 30%-20% = 10%
(Mean of Qtrs >30) / Overall Mean (Median of Qtrs >30) / Overall Median Thus 30%-23% = 7% 26%-20% = 6%
(Mean of Qtrs >25) / Overall Mean (Median of Qtrs >25) / Overall Median 29%-23% = 6% 26%-20% = 6%
Concluded Range: 6% - 10%

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