What is the mystery behind discounts in matrimonial cases? Too often the attorney is faced with interpreting valuation reports for their clients. As if the principles behind the standard of value and the numerous types of valuation approaches and methods are not enough to confuse the client, the attorney then has to try to explain why an asset valued at $10 million was discounted down to $7 million. Where did the $3 million go?
There are many types of discounts but they can be broken into two types: entity-level discounts and shareholder-level discounts. The entity-level discounts would include discounts related to a key person, restrictive agreements, liquidator costs, trapped capital gains, and company specific risks, e.g., depth of management, product or service diversification, concentration of customers or suppliers, contingencies regarding pending litigation, and other company-specific factors.
The entity-level discounts assist the valuation expert in determining the entity value as a whole. Depending on the circumstances, it may then be necessary to apply shareholder-level discounts. The shareholder-level discounts or premiums would include a discount for lack of control and a discount for lack of marketability. These shareholder-level discounts help change the level of value to the specific attributes of the subject interest being valued.
As the saying goes, a picture is worth a thousand words.