The valuation of a privately held, nonpublic business at fair market value requires a consideration of the issues of liquidity and marketability. For purposes of this discussion, these terms are synonymous. Since the owner of the business is unable to convert the value to an immediate sale and realization of cash, the risks associated with this time period enhances the likelihood of not realizing the value appraised the longer the time period between valuation date and actual sale. This creates a need for a discount for lack of marketability from the appraised valuation.
There are no set of defined risk levels which will produce a stated discount and various risks may overlap. Thus the expert business appraiser must determine the appropriate level of the illiquidity discount considering these factors. The typical application of applying a marketability discount to a business value can result in an indicated valuation which reflects anywhere from 10%-to 40% of the value computed without such consideration. Thus the discount can play a very significant role in the valuation of privately held businesses for the purposes of gifts, succession planning, divorces, shareholder disputes, and damages litigation.
–Dennis B.Kremer, CPA/ABV/CFF/CPCGMA, CVA, Partner