Assessing the empirical support for illiquidity discounts in closely held business transactions

Existing illiquidity research has heavily relied upon transactions of minority interests in public companies to develop implied marketability discounts using Pre-Initial Public Offering (“IPO”) and Restricted Stock Studies.{09}The results are often qualitative with no means to measure the “level” of discount or if it is as a result of illiquidity. As a result, courts are increasingly rejecting these studies' findings.; These issues promulgated this quantitative research study using an experimental design examining the significantly larger sample size of almost 5,000 closely held (“entity-level”) transactions found within the BIZCOMPS database in order to identify the variables influencing sellers' price concessions (“discounts”). Holding period (“duration”) was examined to identify its influence on seller pricing concessions (“bid-ask spread”). All-cash versus financed transactions as well as other variables potentially influencing the bid-ask spread were also examined.; This study offers several contributions to the existing DLOM body of knowledge. Research findings suggested strong relationships in the investor-perceived “holding period” and the size of the sellers' concession; especially, when transactions are all cash. Generally, the longer the holding period, the greater the sellers' concessions, the higher the buyers' return and the lower the final sales price of the business, which often resulted in an all cash transaction.; The BIZCOMPS' transactional database successfully addresses the judicial “comparability” issues that existing studies have failed to do. BIZCOMPS offers a larger sample size of controlling interest transactions that isolates the DLOM “impairment” from other distortions found in most existing studies. Finally, revenue size, profitability, and sales terms did not appear to have a direct impact on holding period or seller's concession. These findings will provide far greater acceptance by the financial and legal communities limiting the resources expended on disputes concerning the level of illiquidity discounts.