Business Valuation, DLOM and Daubert: The Issue of Redundancy
Business Valuation Review, Forthcoming
35 Pages Posted: 12 Nov 2009 Last revised: 9 Jan 2011
Date Written: January 7, 2011
Business valuations are a common subject of dispute in tax and divorce litigation, with the valuation consequences of private-company status of a closely held (often family) business being especially contentious. It is not well known that core valuation methodologies such as DCF analysis have the effect of discounting the future cash flows of small businesses substantially, generally by 40% to 60%, dollar-for-dollar, for lack of size alone. Because there is a strong empirical relation between size and liquidity, there is a great likelihood that any supplemental discounting for illiquidity will be redundant and entail double discounting. Accordingly, the large liquidity discounts or DLOMs that are accepted practice in business valuation and that have been embraced by many judges presumptively violate the Daubert requirement for reliability.
Keywords: Business valuation, liquidity discount, Daubert, small business
JEL Classification: A12, D74, G39, K34, K40
Suggested Citation: Suggested Citation