Equitas Valuation has developed a toolkit that provides detailed, simplified instructions for developing both the discount for lack of control and the discount for lack of marketability based on the attributes of the minority ownership interest.  Equitas is currently offering this toolkit as a free download, with no credit card or other payment required. 

Because of the nuances involved with developing discounts for lack of control and marketability, business appraisers have historically been engaged to develop discounts applicable to transfers of minority ownership interests.  This has become problematic for owners of small businesses, as it is often quite expensive (often costing thousands of dollars) to hire an appraiser to develop discounts for each transfer.

To avoid the cost of hiring an outside appraiser, many accountants have simply estimated a combined discount of 30% to 40% for all minority ownership interests, regardless of the situation.  This is especially dangerous, especially since it appears the IRS has increased its scrutiny of the calculation of discounts for lack of control and lack of marketability. 

Discount for Lack of Control

The toolkit incorporates historical purchase price premiums for over 1,000 acquisitions of public companies to provide a supportable benchmark for lack of control for operating companies.  The benchmark for real estate holding companies is also provided, and this benchmark is based on share price data available for nearly 100 publicly traded real estate investment trusts.  The toolkit provides further guidance on adjusting this discount for the following:

     •  Size of the Minority Interest
     •  Swing Vote Potential
     •  Existence of Majority Owners

Discount for Lack of Marketability

The Equitas Discounts for Lack of Control and Marketability toolkit also provides benchmark discount for lack of marketability, which is based on a number of academic and professional research studies.  The toolkit provides guidance on refining the discount for lack of marketability based on:  

     •  Transfer Restrictions of Minority Interests
     •  Rights of First Refusal
     •  Size of Dividend Yield 

The toolkit includes a single-page summary of all calculations necessary to develop discounts for lack of control and marketability for a minority ownership interest.  As with all Equitas toolkits, no finance education is required to implement the valuation methods provided in the toolkit.

Click here to download the Equitas Discounts for Lack of Controland Marketability Toolkit at no charge

The financial markets often serve as a leading indicator for a multitude of economic and financial events.  The valuations of publicly traded companies routinely increase or decrease based on investor expectations of future events.  The financial woes of many European countries were foreshadowed by precipitous declines in the prices of the sovereign debt issued by Greece and Italy.  An analysis of valuation trends in the market often provides evidence of investors’ expectations of future events.

During the period 1980 to 2007, Real GDP increased at a compound annual growth rate of 3.1%.  In comparison, the annual volume of freight shipped via intercity truck increased at an annual rate of 2.8% over the same period.  The associated figure illustrates the correlation between Real GDP and annual ton-miles of truck freight. 

Given the high historical correlation between truck-based freight and Real GDP, we can utilize the market values of publicly-traded trucking companies to provide clues as to investor expectations regarding future utilization of truck freight, and indirectly, the likely economic output.

We often measure the value of entities as a multiple of earnings.  Because net income has a lot of ‘noise’ that makes it difficult to compare two entities, we look at the market value as a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA).  Prior to the downturn in the economy in 2008, publicly traded trucking companies were valued at about 5 times EBITDA.  In the midst of the financial crisis, this declined to about 3.7 times EBITDA.  By the end of 2009, investors expected a moderate economic recovery, and the share prices for trucking companies gradually began to climb, and valuations remained between 6 and 7 times EBITDA through early 2011.  However, late in the summer of 2011, valuations for publicly traded trucking companies declined to just over 4 times EBITDA, very near the valuations that we experienced in the midst of the economic downturn in late 2008.

The recent share prices of trucking companies provide evidence that investors may be anticipating reduced demand for freight services in the near future, which may be a leading indicator of reduced economic activity. 

Retailers most often feel the brunt of economic downturns, and the recession that manifested throughout 2008 and 2009 clearly impacted the valuations of nearly every publicly-traded retailer.  At the height of the financial crisis in December 2008, the market values (calculated as share price times number of shares outstanding) of numerous retailers were approximately 40% of their respective values at the beginning of 2007, prior to the economic downturn.  

Most retailers realized gradual gains in their share prices throughout 2009 and 2010, although the results have varied by the type of retailer.  In general, retailers that market products that are non-discretionary (essential) goods, such as groceries and general merchandise, have realized a stronger recovery in their valuations since early 2009. For instance, the values of retailers that sell predominantly home products are currently valued at about 95% of their respective values prior to the recession.  

Retailers that sell clothing goods have realized a moderate recovery, with these retailers trading at about 75% of the value at the beginning of the recession.  Clothes are not considered as essential as home or grocery products, but clothing is a necessary item, and these retailers tend to recovery quickly from recession lows. 

Electronics products are located even further down the scale from essential items to discretionary items. These retailers were hit hard in the recession, some large 'big box' electronic retailers, such as Circuit City and Ultimate Electronics, eventually were forced into bankruptcy due to the economic recession.  The remaining publicly-traded retailers of electronics are currently trading at a value about 65% of their pre-recession values.  

Finally, bookstore retailers, already hit hard by the economic downturn, are continuing to struggle due to the intense competition from internet-based book retailers and the growing popularity of 'e-books'.  These retailers, which have market values of about 40% of their pre-recession values, are unlikely to ever achieve their historic valuations.  

This analysis is based on historic valuations of 46 publicly-traded companies operating predominantly as retail businesses in the United States.  Equitas Valuation LLC publishes business appraisal toolkits that provide business owners with everything needed to perform a business appraisal of their business interests.

View details of the Equitas Business Appraisal Toolkit for Retailers

The values of hotel properties operating in the United States continue to slowly rebound from lows reached in late 2008 and early 2009, although luxury hotels have realized a quicker rebound compared to low to mid-tier properties.

Values of low to mid-tier properties (defined as properties with an average daily rate of less than $125) reached a recent peak in June 2006 and remained relatively unchanged through the end of the year. As the economic recession took hold, these properties quickly lost much of their value, declining by nearly 50% by the end of 2008. Since then, owners of low to mid-tier properties have realized a consistent, albeit slow, rebound in the value of their hotel properties. By the end of 2010, these properties retained about 60% of their value relative to their values in June 2006.

Upper-tier properties (defined as properties with an average daily rate in excess of $125), were similarly impacted by the recession in 2008 and 2009. However, these properties have realized a quicker rebound in values in the past 12 months. As of the end of 2010, these properties have recovered much of their lost value, and are valued at 80% of their peak values reached a few years earlier.

Why have upper-tier properties regained much of their lost value in the past year, while low to mid-tier hotels are hovering only slightly above their recession lows reached at the end of 2008?

• Owners of low-end hotels are more likely to be overextended, resulting in a
  disproportionately high level of foreclosures at the bottom end of the market. 
  This phenomenon has resulted in depressed price levels for this class of property.
   
• Economic recessions typically have the most impact on the lower and middle-
  class populations, which tend to stay at low or moderately-priced accommodations.

This analysis is based on historic valuations of publicly-traded companies and real estate investment trusts that own and operate hotel properties with a combined 1.2 million hotel rooms. Equitas Valuation LLC publishes business appraisal toolkits that provide business owners with everything needed to perform a business appraisal of their business interests.

View details of the Equitas Business Appraisal Toolkit for Hotel Properties