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December 19, 2018

Value vs. Price: Marketability Discount – Mandelbaum Factors

Abhishek Mathews

Abhishek Mathews
Minerva Valuations Inc./Principal

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Generally larger in absolute value in the U.S. than in Canada, the marketability discount is a discount on the common shares of a business that are not publicly traded, reflecting a lack of liquidity, or the difficulty in selling the shares on the market. This discount typically ranges from 5 – 50% and is often based on the Mandelbaum factors (Bernard Mandelbaum, et al v. Commissioner of Internal Revenue). This case laid out 10 factors that one should consider in determining the appropriate marketability discount on private company common shares.

1. Private versus Public Sales of the Stock

To assist in determining a marketability discount for private company shares, sales of similar interests in comparable businesses are frequently analyzed.

2. Financial Statement Analysis

A non-exhaustive list of relevant considerations to make when analyzing financial statements includes the type of opinion rendered by the accountant; the soundness of the company’s capitalization; the ratio of the company’s assets to liabilities; the company’s net worth and future earning power; the quality of the company’s revenue and earnings; and the company’s goodwill.

3. Dividend History and Policy

Relying on a prior case – Northern Trust Co. v. Commissioner – the court suggested that a company’s dividend policy is a factor in determining the worth of a company’s stock. The fact that a company pays small or no dividends will not always negatively affect the company’s marketability, as an investor may aim to participate in the corporation’s success mainly through the appreciation in the value of his or her stock brought on by retained earnings and the possibility of a future return.

4. Company History, Industry Position and the Economic Outlook

Investors generally regard the nature of a company, its history, its position in the industry, and its economic outlook as relevant factors for determining the worth of the company’s stock. Larger companies are typically considered to be safer because with their larger size, revenue diversification and higher earnings they are better able to deal with economy downswings.

5. Company Management

Investors typically regard the strength / strategic vision of a company’s management as a factor to consider when determining the worth of the company’s stock. An experienced management team with a strong track record will positively impact a company’s value.

6. Control

All things considered equal, investors regard the control inherent in transferred shares as a relevant factor in determining the stock’s worth. An investor will pay more for a block of stock that represents control than for a block of stock that is merely a minority interest in the company.

7. Transferability Restrictions

Investors consider transferability restrictions in determining the business value of a company. All things considered equal, restrictions on the transferability of shares, either directly specified as part of the shareholder’s agreement or as part of regulatory compliance reason, will negatively affect the worth of a company’s stock.

8. Holding Period

The length of time an investment must be held by an investor is a consideration in determining the value of a corporation’s stock. All things considered equal, an interest is less marketable and desirable if an investor must hold it for an extended period of time in order to reap a sufficient profit.

9. Redemption Policy

Investors consider a company’s redemption policy in determining the worth of a company’s stock. Typically, the shareholder’s agreement along with the company’s history of redeeming shares would provide business valuators with appropriate considerations to determine the worth of a company’s stock.

10. Public Offering Costs

Investors consider the costs associated with making a public offering in determining the value of an unlisted stock. All things considered equal, an above-average to average discount is typical if the buyer bears the cost of registering the purchased stock. This discount is lowered as the registration costs can be minimized.

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