The Evolution of DLOM Calculation at Equitest

In the world of business valuation, staying ahead means evolving. At Equitest, we’ve shifted from relying on a single Discount for Lack of Marketability (DLOM) calculation method to embracing four distinct approaches. This move enhances the precision, adaptability, and confidence in our valuations, giving our users a powerful edge.

What is DLOM and Why Does It Matter?

Understanding the Concept of Marketability

Marketability refers to how easily an asset can be bought or sold without affecting its price. For privately held companies or less-liquid assets, this process often comes with challenges. That’s where DLOM comes in—it quantifies the reduction in value due to these marketability issues.

DLOM's Role in Business Valuation

DLOM plays a pivotal role in ensuring that valuation reflects real-world constraints. By accounting for factors like restricted trading and liquidity challenges, it provides a more accurate picture of an asset's worth.

Why the Shift to Multiple DLOM Methods?

1. Adapting to Diverse Market Conditions

The financial landscape is in constant flux. Assets differ in their marketability based on unique conditions such as industry trends, regulatory impacts, and investor sentiments. A single method often falls short of capturing these variations, which is why multiple methodologies ensure accuracy.

2. Enhanced Valuation Accuracy

Each DLOM method—Black-Scholes, Longstaff, Finnerty, and Ghaidarov—analyzes marketability from a different perspective. By integrating these models, we deliver valuations that are robust, reliable, and better tailored to real-world scenarios.

3. Empowering Users

Our users come from various industries with diverse needs. Providing multiple DLOM options allows them to choose the most suitable method for their specific situation, enabling informed and strategic decision-making.

Understanding the Four DLOM Methods

1. Black-Scholes Model

This approach leverages financial options theory to calculate DLOM, focusing on factors like asset volatility and time constraints. It’s particularly effective for assets with established market price patterns.

2. Longstaff Model

Designed to evaluate liquidity costs, this method suits assets where illiquidity is a major concern. It often results in higher DLOM values, reflecting the challenges of holding non-marketable assets.

3. Finnerty Method

Using a bond-pricing analogy, the Finnerty method is ideal for assets with predictable holding durations. It provides a moderate DLOM value, balancing liquidity and volatility considerations.

4. Ghaidarov Model

The Ghaidarov method incorporates advanced statistical techniques, delivering nuanced DLOM values. It’s especially useful for complex or dynamic market conditions.

Real-World Results: A Comparison of DLOM Models

At Equitest, we apply these methods to offer diverse insights. Here’s a sample result for a hypothetical asset using each methodology:

Analyzing the Range of Results

• Black-Scholes (0.2385): A moderate value reflecting volatility and time constraints.
• Longstaff (0.5499): The highest value, capturing liquidity challenges.
• Finnerty (0.2221): Another moderate value, emphasizing predictable holding periods.
• Ghaidarov (0.1978): The lowest value, applying advanced statistical models.

This range showcases how different methodologies provide insights tailored to asset characteristics and market conditions. Users can select the approach that best aligns with their valuation needs.

How Users Benefit from Multiple DLOM Approaches

1. Tailored Valuations

By choosing the method that best fits their asset’s characteristics, users can achieve more relevant and precise valuations.

2. Improved Decision-Making

A deeper understanding of marketability discounts empowers users to make strategic decisions regarding their assets.

3. Increased Confidence

Having access to multiple methods ensures a comprehensive evaluation, fostering trust in the results.

4. Educational Support

Equitest offers guides, tutorials, and webinars to help users grasp the nuances of each DLOM method. For instance, users might explore a case study that illustrates how selecting the Finnerty method improved valuation accuracy for a private equity firm.

Conclusion

Equitest’s shift to multiple DLOM calculation methods isn’t just an upgrade—it’s a commitment to empowering our users with flexibility, precision, and confidence. By combining the strengths of various methodologies, we ensure our valuations reflect the complexities of modern markets. Whether you’re valuing a startup or a mature enterprise, Equitest provides the tools you need to make informed decisions.