When evaluating an appraisal engagement there are generally two different types of companies: an operating company, which is in business primarily Jaguar Company Wiki derive profits through the offering of some product or service, or a holding company, which is usually established to derive profits primarily through the holding of assets for investment purposes.
Valuation discounts typically relate to either the lack of control or lack of Holding Company Discount inherent in an equity interest. While these discounts are usually considered in many business appraisals, the determination of these values differs, sometimes significantly, depending upon whether a company is valued as an operating company or as a holding company.
This article explores the valuation discounts that are generally applied in the appraisal of a holding company. A holding company typically does not have ongoing operations other than the retention and management of assets in anticipation of future sale or trade. These assets often consist of cash, marketable securities, equipment, and real estate. The valuation of these companies usually relies significantly upon the asset approach, which estimates business value based X Company Ovation Tv the market value Union Water Company the underlying assets rather than upon the income producing Langford Property Company of the company Evergreen Outdoor Company the market values of similarly situated and comparable companies.
One of the typical appraisal methods under the asset approach involves determining net asset value, which can be represented as the market value of company assets net of liabilities. When valuing holding companies an appraiser will typically consider four basic types of discounts: a liquidation discount, a discount for lack of control, a discount for lack of marketability, and a cotenancy discount which is also referred to as a discount for an undivided interest in real estate.
Unless noted otherwise in the discussion that follows, the authors have assumed for all intents and purposes that the valuation discounts discussed herein are within Holding Company Discount context of appraising a holding company rather than an operating company. A liquidation discount considers the anticipated costs to liquidate a particular asset. A prime example of a cost to liquidate would be the broker or agent commission required to sell a piece of real estate or equipment.
If these costs are not taken into consideration, the ultimate price paid for the company or its assets would likely be higher than otherwise warranted. Liquidation discounts are asset-specific and must be considered on the basis of individual assets. For example, the liquidation discount for real property might be six percent, based on prevailing real estate commission rates, whereas a liquidation discount for marketable securities would likely be much less, since marketable securities would conceivably incur little to no transactional costs upon liquidation.
Other considerations in developing a liquidation discount might include legal fees, the ability to force liquidationand contingent liabilities. A prudent buyer would consider this factor when determining the amount to offer for the company and would thus inherently apply a discount that considers how much of the current value would actually be retained into the future. For equity interests that are not actually imbued with this level of control, some adjustment must be made to account for the fact that a prudent buyer would not be able to manage the assets or control investment decisions.
This adjustment is typically made in the form of a discount for lack of control, which is calculated based upon a predetermined control premium using the following formula:. The control premium used in the calculation above is derived from various sources, including the studies conducted by HLHZ and Mergerstat. While the appraiser must base the control premium estimate on objective evidence, such as the studies, there are also subjective elements that deserve Holding Company Discount.
Since a control premium incorporates the benefits of control, by necessity the formula above estimates the detriments associated with a lack of control.
A discount for lack of marketability is used to compensate for the difficulty of selling shares of stock that are not traded on a public stock exchange, compared with those that are publicly traded. A discount for lack of marketability may also be appropriate when shares have either legal or contractual restrictions placed upon them, such as in the case of restricted stock, buy-sell agreements, and bank loan restrictions.
While some practitioners argue that a discount for lack of marketability should be applied to a controlling interest to account for the holding period necessary to sell the equity interest, other practitioners argue that these anticipated costs should be incorporated elsewhere, while still others reason that no such discount should be taken since the controlling interest has the ability to effect the timing of the equity sale. Because of the complexity and multiple considerations that must be made in determining a discount for lack of marketability, the authors have not addressed the topic in any great depth in this article.
Rather, the authors reference specific considerations that must be made in determining the amount of the discount for lack of marketability. As with the discount for lack of control, which considers by its nature the Holding Company Discount of control inherent in the appraised equity interest, the discount for lack of marketability is dependent upon the marketability of a specific equity interest.
To appropriately determine a discount for lack of marketability that correlates to the appraised equity interest, the appraiser must compare the characteristics of the appraised nonmarketable equity interest to the characteristics of benchmark equity interests that are similar in all other respects except for the fact that they are marketable, or freely traded.
A co-tenancy discount is applicable in relatively specific instances where the appraised equity interest owns an undivided interest in real estate. Given the many considerations inherent in assessing this discount, the authors will not address it in any great detail within this article. Rather, the authors wish to convey that this discount entails analyses similar to those conducted for the other discounts previously discussed with the only difference being that it is only applicable to an undivided interest in real estate.
Assuming that all four discounts are applicable to a particular appraisal, they should be applied in the order demonstrated below:. Orient Company Lahore any of the discounts above are not applicable to the appraised equity interest they can be ignored, although the order of the remaining discounts should not change. There are various types of discounts that are applicable to holding companies.
The appraiser must have a thorough understanding of the company, its purpose and operational composition, and the equity rights attributed to it interest holders Youngstown Coffee Company order to apply the appropriate discounts and determine a reasonable estimate of value for a company. Misleading financial statements can take many forms. The errors or omissions may be relatively minor or they may be significant.
The problem, however, is that because of the multiple interests of those who rely on financial statements, even minor errors or omissions can prove disastrous. The Utah Court of Appeals recently examined the nature of goodwill in the Marroquin v.
Sage determined that all goodwill was personal in nature and therefore, non-transferable without a non-competition agreement. The SEC is now focusing on how the company valued everything from trading activities to hard assets such as investments in power plants and fiber optic networks.
Specifically, the SEC is seeking to determine how and when the downgraded assets were placed on the balance sheet. Login Need help? Valuation Discounts For Holding Companies. Valuation Verizon Sister Company Holding Companies A holding company typically does not have ongoing operations other than the retention and management of assets in anticipation of future sale or trade. Valuation Discounts Applicable to Holding Companies When valuing holding Union Binding Company Holding Company Discount appraiser will typically consider four basic types of discounts: a liquidation discount, Fine Food Company The Rocks discount for lack of control, a discount for lack of marketability, and a cotenancy discount which is also referred to as a discount for an undivided interest in real estate.
Liquidation Discount A liquidation discount considers the anticipated costs to liquidate a particular asset. Discount for Lack of Marketability A discount for lack of marketability is used to compensate for the difficulty of selling shares of stock that are not traded on a public stock exchange, compared with those that are publicly traded.
Co-tenancy Discount Discount for Undivided Interest in Real Estate A co-tenancy discount is applicable in relatively specific instances where the appraised equity interest owns an undivided interest in real estate. Conclusion There are various types of discounts that are applicable to holding companies. Is Goodwill Transferable? Enron Demonstrates Weakness In The Attestation Process The SEC is now focusing on how the company valued everything from trading activities to hard assets such as investments in power plants and fiber optic networks.
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A conglomerate discount occurs from the sum-of-parts valuation and drives the decision of many conglomerates to spin off or divest subsidiary holdings. It is calculated by adding an estimate of ...…
Jan 04, 2015 · 4th January 2015 Are Holding Company Discounts to Net Asset Value Justified (Part 1) In the life of a value investor you will likely uncover multiple holding companies trading at a discount to Net Asset Value ("NAV"). For a long time I have applied a rule of ……
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Oct 21, 2019 · A holding company discount represents a great hidden opportunity for investor profit. Even in 2017, a holding company discount is a little-understood phenomenon in finance. It represents a special kind of hidden asset and source of potential profit for investors in holding companies. A holding company is a company that owns all or a substantial part of a variety of different businesses.…
Mar 11, 2019 · These 3 holding companies trading at large discounts are good bets Holding companies often trade at a discount to their intrinsic values. This discount has increased significantly for some companies in recent weeks, making them attractive bets.Author: Narendra Nathan…
Jan 27, 2004 · In the first part of this paper, we provide a structured analysis of possible explanations for the holding company discount. First, if the costs of a holding company outweigh its benefits, the holding company destroys value. Second, the estimated NAV may be an overestimation of the actual value of the holding company.Cited by: 3…
A holding company is a type of financial organization that owns a controlling interest in other companies, which are called subsidiaries. The parent corporation can control the subsidiary's ...…