The 1991 Silber Study of Restricted Stock Discounts
We Should Have Known Then
Excerpted from www.ChrisMercer.net Blog
By the time I came into the business valuation profession, appraisers recited a small number of restricted stock studies to conclude that typical discounts were in the range of 25% to 45%, and therefore, that marketability discounts for illiquid minority interests of private companies should be in that range, as well.
But Professor William L. Silber wrote an article in the respected Financial Analysts Journal that told a different story.1 However, business appraisers ignored wisdom found in the Silber Study and only took its conclusion that the average discount in the study was 34% as confirming of the existing lore.
Summary statistics from the Silber Study are provided in Exhibit 8.4 of our forthcoming book, Business Valuation: An Integrated Theory, Third Edition (Mercer & Harms, Wiley 2020), which is available for purchase on Amazon.com. Exhibit 8.4 is reproduced on page 3 of this newsletter.
But wait, there’s more. Professor Silber looked at his sample of 69 restricted stock discounts and noticed a distinct difference between the companies that had lower discounts (less than 35%) and higher discounts (greater than 35%). The study provided additional color as found in Exhibit 8.5 (on page 3 of this newsletter).
What a difference a more informed look makes. The average for transactions with discounts exceeding 35% was 54%, while the average for transactions with discounts less than 35% was 14%. What could have caused this difference? Professor Silber provided summary statistics for the two subgroups. Simply put, the companies with lower discounts were just more attractive in terms of cash flow, perceived risk, and likely expected growth than the companies with higher discounts. They were larger in terms of revenue and market capitalization and more profitable than the companies in the larger discount sample.
A picture is helpful. I wrote about the Silber Study in Quantifying Marketability Discounts (which introduced the QMDM) in 1997 and provided a chart similar to Exhibit 8.6 from the new book (on page 3 of this newsletter).
