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Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.

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Disclaimer
The material in this webinar is for informational purposes only. It should not be considered
legal, financial or other professional advice. You should consult with an attorney or other
appropriate professional to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate,
Financial Poise™ makes no guaranty in this regard.
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Meet the Faculty
MODERATOR:
John Levitske - Ankura Consulting Group, LLC
PANELISTS:
Lee Gould - Gould & Pakter Associates LLP
Angela Sadang - Marks Paneth LLP
Mark Zyla - Zyla Valuation Advisors, LLC
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About This Webinar
Minority and Illiquidity Discounts
Like the sale of goods, sometimes the share of ownership in a company must be discounted
due to difficulty in finding a buyer. Liquidation costs of equity in private businesses may be
substantial, and the equity’s value is discounted for that potential illiquidity. Likewise, partial
ownership of a private firm may be worth less than proportional share of the total business.
This webinar delves into these types of discounts and how they may impact the valuation of
your asset.
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About This Series
Valuation 2021
What’s it worth? Whether you are engaged in the sale of an asset or attempting to recover damages in
litigation, valuations are often necessary for convincing the other side that your price is right. In
transactions, valuations assist parties in determining the price they are willing to pay or receive in the sale
of a security, business, or asset. In litigation, valuations play a critical role in setting a baseline for
damages awards. Expert assistance is required to accurately value many assets, whether it is a
business, a security, an intangible asset such as intellectual property or a brand, or lost profits in a
litigation context. Choosing the appropriate valuation expert can make or break your transaction or your
case, given the extensive battles between valuation experts that arise in contested matters. This series
provides an overview of valuation in its many contexts, from business valuations in transactions to battles
between valuation experts in all aspects of litigation.
Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and
executives without much background in these areas, yet is of primary value to attorneys, accountants, and other
seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to
entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that
participants will enhance their knowledge of this area whether they attend one, some, or all episodes.
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Episodes in this Series
#1: What's it Worth? Valuing a Business for Sale
Premiere date: 2/3/21
#2: Valuing Lost Profits for Litigation Purposes
Premiere date: 3/3/21
#3: Selecting the Right Valuation Expert
Premiere date: 4/7/21
#4: Minority and Illiquidity Discounts
Premiere date: 5/5/21
#5: Valuing Your Brand and Other "Soft" Assets
Premiere date: 6/2/21
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Episode #4
Minority and Illiquidity Discounts
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Agenda
I. Levels of Value
II. Minority Discounts (Discounts for Lack of Control)
III. Illiquidity Discounts and Discounts for Lack of Marketability
IV. Magnitude of Discounts if Applicable
V. Topical Areas
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VI. Appendix: About the Faculty

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I. Levels of Value
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Classic Levels of Value
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What is a Minority Ownership Discount?
• Typically owning a controlling share of a firm carries a relative premium
 Conversely, lacking control requires a discount
• Also called a “lack of control” discount
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What is an Illiquidity Discount?
• Liquidation of equity interests in a private firm is more difficult than in a publicly traded
company and so has higher transaction costs as a percentage of firm value.
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Magnitude of Discounts
• Commonly: Valuation is a function of expected cash flows, risk and growth
• Size and applicability of discounts depends on the facts and circumstances related
to:
 The purpose of the valuation
 The subject closely held company
 The subject nonmarketable business ownership interest
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II. Discount for Lack of Control
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Minority Ownership / Lack of Control Discount
• What is “control”?
 100% has control
 Between 66 2/3% and 100% is a supermajority
 Between 50% and 66 2/3% is control but cannot liquidate
 50-50% is a tie and no one really has control
 Less than 50% represents a minority
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Minority Ownership / Lack of Control Discount
• Minority interests in a privately-held company are worth less on a per-share basis
than controlling interests
• A minority shareholder is usually unable to effectively influence the operations or
results of the business
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Minority Ownership / Lack of Control Discount
• In private firms, control is an issue when considering how much to pay for a private firm
 May have a premium for a badly managed private firm because buyer thinks
could run it better
 The value of control is directly related to the discount that would attach to a
minority holding (less than 50%) as opposed to a majority holding
 The value of control also becomes a factor in how much of an ownership stake
a buyer will demand in exchange for a private equity investment
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Privileges of Control
• Elect directors and appoint management
• Determine management compensation and perquisites
• Set policy and change the course of business
• Acquire or liquidate assets
• Select people with whom to do business and award contracts
• Make acquisitions
• Liquidate, dissolve, sell, leverage or recapitalize the company
• Sell or acquire treasury shares
• Register the company’s stock for a public offering
• Declare and pay dividends
• Change the articles of incorporation or bylaws or operating agreement
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Degree of Control
• Benefits of control depend on the degree of control in the shareholder’s interest
• Degree of control determined by:
 Relevant law in the jurisdiction (e.g., whether the jurisdiction requires a two-
thirds majority to approve certain actions)
 Corporate agreements – the company’s articles of incorporation, shareholders’
agreement, or operating agreement may affect the powers of a controlling
shareholder
 Distribution of shareholder interests
 Ability to control dividends
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Degree of Control
• Degree of control will influence the magnitude of the discount
• Adjustments to reflect different degrees of control are made on a case-by-case
basis
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III. Illiquidity Discounts and Discounts for
Lack of Marketability
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Common Instance Where This Arises
• Population of potential buyers for most closely held company ownership interests is
smaller than the potential buyers for most publicly traded securities
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Lack of Marketability vs. Lack of Liquidity
• Anything liquid has to be marketable
 Any asset that is quickly and easily converted to cash at minimal cost and
minimal loss in value (i.e., a liquid asset) must, by definition, have no
characteristics that impair the salability of the asset (i.e., a nonmarketable
asset)
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Lack of Marketability vs. Lack of Liquidity
• Reverse of the proposition is not true – an asset or ownership interest can be
marketable but not liquid
 Assets can have impaired liquidity (i.e., due to higher costs of selling or a
longer period required for sale)
 BUT the impairment in liquidity is not of sufficient degree to cause the salability
(i.e., marketability) of the asset to become impaired
 Example: a controlling interest in a privately-owned company is considered
illiquid because it’s not “actively traded public stock” yet it can still be readily
sold because it’s a controlling interest, not a minority one
 Lack of marketability is generally considered to command a much greater
discount than that of illiquidity alone
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Lack of Marketability
• “…an amount or percentage deducted from the value of an ownership interest to
reflect the relative absence of marketability”
 Source: International Glossary of Business Valuation Terms
• Marketability is valuable
 All things equal, investors will pay more for the more liquid (marketable) asset
 Discount for lack of marketability is largest money issue in many, if not most,
disputed valuations of minority interests in closely-held, private companies
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Lack of Marketability
• Context/Frame of Reference
 Valuation “reference points” generally derived from freely traded securities
o Discount rates derived from vendor databases (i.e. Duff & Phelps,
competitors)
o Market multiples derived from guideline securities
o Discount rates derived from P/E multiples
 Since the object of most business valuations is a closely-held, non-marketable
security, a discount is warranted from the value derived using “freely traded”
reference points
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Lack of Liquidity
• Liquidity implies the preservation of value when a security is bought or sold
• When the sale of ownership interests results in a large loss of value, it’s less liquid
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Categories of Stock
• Actively traded public stock – liquid
• A large block of public stock (blockage) – marketable illiquid
• Thinly traded public stock – marketable illiquid
• Restricted stock in a public company – marketable illiquid
• Control interest in a public company – marketable illiquid
• Control interest in a private company – marketable illiquid
• Minority interest in a private company – nonmarketable
• Real estate – marketable illiquid
• Machinery and equipment – marketable illiquid
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IV. Magnitude of Discounts if Applicable
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Magnitude of the Discount
As previously noted
• Commonly: Valuation is a function of expected cash flows, risk and growth
• Size of the discount depends on the facts and circumstances related to
 The purpose of the valuation
 The subject closely held company
 The subject nonmarketable business ownership interest
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Factors in Determining Discount
• Company's financial performance and growth
• Size of distributions
• Prospects for liquidity (expected liquidity event)
• Restrictions on transferability
• Company's redemption policy
• Pool of potential buyers
• Nature of the company, its history, other risk factors
• Amount of control in transferred shares
• Company's management
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Benchmarks
• Benchmarks used are typically industry data that may be used to compare a
company to in order to determine its relative historical performance
• Appraisers will calculate a controlling marketable interest and then apply the various
discounts using these benchmarks
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Categories of Stock
• Actively traded public stock – liquid
• A large block of public stock (blockage) – marketable illiquid
• Thinly traded public stock – marketable illiquid
• Restricted stock in a public company – marketable illiquid
• Control interest in a public company – marketable illiquid
• Control interest in a private company – marketable illiquid
• Minority interest in a private company – nonmarketable
• Real estate – marketable illiquid
• Machinery and equipment – marketable illiquid
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Restricted Stock Study
• Restricted stock is the stock of a public company that is identical in all aspects to
freely traded stock of the company, except that it is restricted from trading on the
open market for a certain period of time
 Usually around six months, may be as high as 12-24
• Studies done on publicly reported sales of restricted stock (reporting required by the
SEC) compare the sale prices in restricted stock transactions with the
corresponding daily trading price of the same publicly-held company
• Since buyers of restricted stock are subject to holding period restrictions, the
difference in price paid potentially measures the discount for lack of marketability
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Valuation Methods and Levels of Value
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LEVELS OF VALUE AND TYPES OF VALUATION METHODS
Valuation Method If Basis of Income Control / Minority Marketable / Non-Marketable
Income Approach
Capitalization of Benefits Control Cash Flows / [Minority] Control / [Minority] Marketable or Non-Marketable
Discounted Future Benefits Control Cash Flows / [Minority] Control / [Minority] Marketable or Non-Marketable
Excess Earnings Control Cash Flows Control Marketable or Non-Marketable
Market Approach
Guideline Public Company Control Cash Flows / [Minority] Control / [Minority]* Marketable
Acquisition Method Public Cos. Control Cash Flows Control Marketable
Acquisition Method Private Cos. Control Cash Flows Control Non-Marketable
Asset-Based Approach
Adjusted Book Value n/a Control Marketable
Liquidation n/a Control Marketable
Cost to Create n/a Control Marketable
*:See slide 41.

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V. Topical Areas
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Common Contention Issues or Potential Errors in
Determining Discounts
• Leads to Lower Value Indication
 Conservative projections
 High discount rate
 Large DLOM (discount for lack of marketability)
• Leads to Higher Value Indication
 Aggressive projections
 Low discount rate
 Small DLOM, etc.
• Whether conservative projections should be accompanied by a lower discount rate
• Whether aggressive projections should be accompanied by a higher discount rate
• Discount rate to apply to a projection is a different concept (cost of capital) than
level of value related discounts such as for lack of control or liquidity
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Common Potential Errors in Determining Discounts
• Using synergistic acquisition premia to quantify premiums for control
• Assuming that the discounted cash flow valuation method always produces a minority
value
• Assuming that the guideline public company method always produces a minority value
• Valuing underlying assets instead of the stock or partnership interests
• Using minority interest marketability discount data to quantify marketability discounts for
controlling interests
• Using only pre-initial public offering studies and not restricted stock studies as
benchmark for discounts for lack of marketability
• Indiscriminate use of average discounts or premiums applying (or omitting) a premium or
discount inappropriately for the legal context
• Quantifying discounts or premiums based on past court cases
• Using a tangible (real property, fixed assets, etc.) appraiser to quantify discounts and
premiums
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Potential Areas of Dispute
• Whether guideline public company method yields a controlling-level of value
• Discounts for controlling, illiquid interests
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VI. Appendix: About the Faculty
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About The Faculty
John Levitske - John.Levitske@Ankura.com
John Levitske, CPA/ABV/CFF/CGMA, ASA, CFA, CFLC, CIRA, MBA JD serves as a
business valuation, forensic accounting and damages expert witness, arbitrator, and advisor.
He provides business valuation, forensic accounting, purchase price analysis, damage
quantification, and dispute resolution services in complex commercial situations. He testifies
as an independent expert witness in disputes, both domestic litigation and international
arbitration, regarding issues of valuation, finance, accounting (e.g., GAAP) or damages. He
also acts as a neutral expert determiner or neutral arbitrator and advises clients in mediations
and negotiations. He is frequently consulted regarding business disputes, shareholder
disputes, M&A transaction disputes and bankruptcy.
To read more, go to https://www.financialpoise.com/webinar-faculty/john-levitske/
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About The Faculty
Lee Gould - lgould@litcpa.com
Mr. Gould focuses on performing valuations of closely held businesses, lost profit and
economic damages determination and forensic and financial accounting analysis. He has
almost forty years of experience in diverse engagements in numerous industries. Mr. Gould
has testified in Federal and State courts and participated in alternative dispute resolutions. He
has been recognized as an expert in business valuations, economic damages determination,
financial analysis, tracing assets and sources of funds used to purchase assets, revenue and
expense analyses and business economics.
To read more, go to https://www.financialpoise.com/webinar-faculty/lee-a-gould/
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About The Faculty
Angela Sadang - ASadang@markspaneth.com
Angela Sadang is a Principal in the Advisory Services group at Marks Paneth LLP. Ms. Sadang
specializes in business valuations and the valuation of intangible assets and has over 25 years’
experience providing corporate financial consulting services and performing valuations. She serves
both publicly traded and closely held companies in a wide range of industries that also involves
various asset classes. Ms. Sadang is a Chartered Financial Analyst (CFA) as designated by the
CFA Institute and is an Accredited Senior Appraiser (ASA) with specialty certifications in business
valuation and intangible assets as designated by the American Society of Appraisers. She also
holds an Accredited in Business Valuation (ABV) credential from the American Institute of Certified
Public Accountants. Her valuation experience includes business enterprise and intangible asset
valuation for financial and tax reporting, transfer pricing, mergers, acquisitions, divestitures,
reorganizations, gift/estate tax compliance, family wealth planning and ownership succession, audit
and litigation support, shareholder disputes, ESOPs, going private or public, and fairness and
solvency opinions.
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About The Faculty
Mark Zyla - mzyla@zylavaluationadvisors.com
Mark Zyla is Managing Director at Mark Zyla is Managing Director at Zyla Valuation Advisors,
LLC. He enjoys assisting his clients with solving complex valuation issues. Additionally, he is
active within the valuation profession. He is currently chairing the Standards Review Board
of the International Valuation Standards Council which sets valuation standards worldwide.
He was the primary author of the education program of the AICPA and the Royal Institute of
Chartered Surveyors for the Certified in Entity and Intangible Asset (CEIV) credential,
certifying valuation professionals in valuation for financial reporting purposes.
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Questions or Comments?
If you have any questions about this webinar that you did not get to ask during the live
premiere, or if you are watching this webinar On Demand, please do not hesitate to email us
at info@financialpoise.com with any questions or comments you may have. Please include
the name of the webinar in your email and we will do our best to provide a timely response.
IMPORTANT NOTE: The material in this presentation is for general educational purposes
only. It has been prepared primarily for attorneys and accountants for use in the pursuit of
their continuing legal education and continuing professional education.
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About Financial Poise
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