© 2009 FMV Opinions, Inc., All Rights Reserved | Questions: [email protected] Looking at the New Data in The FMV Restricted Stock Study™ and

© 2009 FMV Opinions, Inc., All Rights Reserved | Questions: [email protected]

Looking at the New Data in The FMV Restricted Stock Study™ and How to Use it!

New York • San Francisco • Los Angeles • Irvine • Chicago • Dallaswww.fmv.com800.622.0519

Instructor - Lance S. Hall, ASA

November 11, 2009

Business Valuation Resources

© 2009 FMV Opinions, Inc., All Rights Reserved | Questions: [email protected] 2

The FMV Restricted Stock Study™ - New Developments

Recently added more than 120 new transactions

VIX variable available for each transaction between July 1990 and December 2008

More detailed information regarding registration of shares

Coming Soon: Over 40 new transactions subject to 6-month

Rule 144 initial holding period Updated Companion Guide freely available at

bvresources.com

3© 2009 FMV Opinions, Inc., All Rights Reserved | Questions: [email protected]

Today’sOutline

• Discounts Over 50% are O.K.• Theoretical Foundation• What is Restricted Stock?• The FMV Restricted Stock Study™• How to Use the FMV Study• Case Study


Discounts Over

50% are O.K.


Discounts Over50% are O.K.

During times of extreme volatility in the stock or in the market, discounts for lack of marketability will often exceed 50 percent.


2008 the Dow Plummets

Dow Jones Industrial Average

8000

9000

10000

11000

12000

13000

14000



Investors Seek Safety and Liquidity in Short-Term Treasuries

3-Month Treasury Yields

0

0.5

1

1.5

2

2.5

3

3.5

1/2/08 2/1/08 3/2/08 4/1/08 5/1/08 5/31/08 6/30/08 7/30/08 8/29/08 9/28/08



The FMV Restricted Stock Study™


1980 – 2008

Analyzing Volatility

Volatility DiscountHigh Low Average High Low Average Median

Top Decile 2,024.7% 144.8% 285.4% 91.3% 0.0% 44.3% 45.7%Top Quintile 2,024.7% 110.8% 204.7% 91.3% 0.0% 39.4% 36.3%Second Quintile 110.2% 82.4% 97.6% 59.0% 1.9% 25.8% 23.8%Third Quintile 82.0% 71.2% 76.3% 64.2% 0.0% 19.9% 16.3%Fourth Quintile 71.1% 54.0% 61.7% 56.6% 0.0% 19.0% 17.6%Bottom Quintile 54.0% 2.8% 39.5% 84.3% 0.0% 15.8% 12.9%Bottom Decile 41.9% 2.8% 30.3% 43.3% 0.0% 11.8% 9.4%


VIX "is a good indicator of the level of fear or greed in U.S. and global capital markets. When investors are fearful, the VIX level is significantly higher than normal.”[1]

[1] Antognelli, Ferreira, McArdle, and Traub, "Fear and Greed in Global Asset Allocation" The Journal of Investing (Spring 2000), pp. 27—32.

Chicago Board Options Exchange’sVolatility Index



“VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.” [2] [2] Investopedia, a Forbes digital company.

Chicago Board Options Exchange’sVolatility Index



VIX

0

10

20

30

40

50

60

70

80

90



2008 Fall VIX Readings

0

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2008-2009 VIX Readings

0

10

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Market Volatility Analysis1

VIX 6-Month

Average

Low High

Top Decile 28.53 - 32.87 29.6 6.9% 27.8 2.9 32.1% 42.7%Top Quintile 25.75 - 32.87 28.5 8.1% 27.7 2.8 26.9% 19.6%Second Quintile 23.33 - 25.74 24.3 7.2% 39.2 3.5 25.0% 11.1%

Middle Quintile 17.52 - 23.33 22.2 9.6% 39.5 3.5 22.5% 0.0%

(1) Excludes transactions with "% Shares Placed" > 20% and "Market Value" > $100 million. Transaction set includes 234 transactions between 1990 and December 31, 2008.

MedianTrans.

Discount

MultiplicativeAdj. Factor

From MiddleQuintile

PercentSharesPlaced

MarketValue

MTBRatio

MedianVIX


From September 19th through December 29th, 2008, the VIX Averaged 56.6.

If the VIX is 56.6, the Discount for Lack of Marketability Should be 17 to 37 Percentage Points Higher than During Normal Times!



From January 2nd through April 6th, 2009, the VIX Averaged 44.8.

If the VIX is 44.8, the Discount for Lack of Marketability Should be 11 to 27 Percentage Points Higher than During Normal Times!



Further Evidence: Western Alliance Bancorporation

June 27, 2008 Private Placement:

Block Size – 11.2% Registration Rights (45 days) Public Price – $8.11 per share



Further Evidence: Western Alliance Bancorporation (cont.)

September 30, 2008 Private Placement:

Block Size – 11.3% Registration Rights (30 days) Public Price – $15.46 per share



Market Conditions

June 27 Sept. 30 %Δ B of A $23.51 $34.13 4̂5.2% Wells $23.06 $36.41 5̂7.9% WAL $8.11 $15.46 9̂0.6%





Which Transaction Date has the Higher Discount?




June 27, 2008 Private Placement: Discount = 2.1%

September 30, 2008 Private Placement:

Discount = 25.6%



Further Evidence: Western Alliance Bancorporation

WHY? June 27, 2008 Private Placement:

VIX = 24.0

September 30, 2008 Private Placement: VIX = 39.4




Historic Volatility

2 1 6 3 1 2Years Year Months Months Month Weeks

As of June 27, 2008 49% 64% 68% 56% 50% 52%

As of September 30, 2008 82% 109% 137% 182% 226% 333%

% Change 66% 70% 101% 223% 348% 544%



2008 Private Placements - Common Stock and Common Stock With Warrants

Transaction Discounts and VIX

0

5

10

15

20

25

30

35

40

45

1st Half 2008 (N=72) 2nd Half 2008 (N=46)

Transaction Discount (%)

Average VIX



What Does 2008 Tell Us?

When the VIX increased by 79%, the Discount increased by 65%!

If your Discount in the first half of 2008 was 30%, then your second half discount should be 49.5%!



TheoreticalFoundation


Theoretical Foundation

Marketability – What is Legally Permissible

Liquidity – What is Practical and Achievable


Theoretical Foundation

Investment Performance: Changes in a Way to Influence You to Sell (Actual & Relative)

Personal Needs: Changes in Personal Cash Needs

Exit Strategy: Changes in Anticipated Exit Means


What isRestricted Stock?


Restricted Stock Comparisons

Arm’s-Length Transactions But for Restrictions Identical Securities Restrictions Solely Affect Marketability Contemporaneous Transactions

What is Restricted Stock?


Restricted Stock Comparisons

Temple v. U.S., No. 9:03-CV-165 (March 10, 2006)

“The better method is to analyze the data from the restricted stock studies and relate it to the gifted interests in some manner, as [the IRS’s expert] did.”




Securities Act of 1933; Reg. §230.144

Definitions: “affiliate” “person” “restricted”; Not an underwriter; Holding period; Volume limits; Manner of sale; Broker’s transactions; Notice of intention to sell; and Termination of restrictions for non-affiliates.



Securities and Exchange Act of 1934 1934 Act, Section 16

a. Disclosures required Applies to 10% owners, directors, or

officersb. Short-swing profit recoveryc. No short sellingd. Exemptions

Often, companies will institute “black-out” periods to ensure compliance with Section 16



1972 SEC Adopts Rule 144 Two-Year Holding Period Dribble-Out Provisions:

Every Quarter, Greater of: One percent of total shares

outstanding, or Average weekly trading volume over

prior four weeks



Restrictions Applicable to Unregistered Stock Affiliate Stock (Dribble-Out Provisions)

Insider Over 10 Percent Ownership

1983 Rule 144(k) Non-Affiliate, 3-Year Maximum

Restriction



1990 Tacking No “Restart” 1983 Rule 144(k)

1997 Amendment One-Year Holding Period Non-Affiliate, Two-Year

Maximum Restriction 2007 Amendment

Six-Month Holding Period


Revenue Ruling 77-287

Risk of value change that “would have” prompted decision to sell

Risk that means of disposal may not materialize

Four rules for determining discount: No formulas; Function of earnings, assets, sales; Function of trading market; and Function of resale constraints


Restricted Stock Study Years Average

Institutional Investor Study 1966-1969 25.8%

Gelman 1968-70 33.0%

Trout 1968-72 33.5%

Moroney Not Specified 35.6%

Maher 1969-73 35.4%

Standard Research Consultants 1978-82 45.0%

Willamette Management Assoc. 1981-84 31.2%

Silber 1981-88 33.8%

Management Planning 1980-96 27.1%

Traditional Restricted Stock Studies

* Source: Pratt, Reilly, and Schweihs: Valuing a Business, 4th Ed., 2000


THE FMV RESTRICTED STOCK STUDY™*

* Available Through BVR at bvresources.com


The FMV Restricted Stock Study™

597 Transactions from 1980 through 2008

50+ Data Fields per Transaction All Arm’s-Length Transactions Pure Play – No Warrants, Units, or

“Sweeteners” The Largest Restricted Stock

Study Available Anywhere


The FMV Restricted Stock Study™ - New Developments

Recently added more than 120 new transactions

VIX variable available for each transaction between July 1990 and December 2008

Over 40 new transactions subject to 6-month Rule 144 initial holding period

More detailed information regarding registration of shares

Updated Companion Guide freely available at bvresources.com


The FMV Restricted Stock Study™ — Histogram

Histogram: The FMV Restricted Stock Study (1980-2008)

010

20304050

607080

90100

< -10%

-10%

to -5

%

-5%

to 0

%

0% to

5%

5% to

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to 15

%

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to 20

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%

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%

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%

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to 10

0%

Restricted Stock Discount

Fre

qu

ency


Dispersion of Data by Discount Quintile

1980 – 2008 (All Transactions, 597 Count*)

* All company financial characteristics throughout this presentation have been inflation-adjusted to 2009 dollars. Financial information provided at bvresources.com is not adjusted for inflation.

Quintile 1 2 3 4 5

Discount 1.6% 10.5% 16.7% 27.3% 43.7%

Market Value ($) 166,358 162,682 110,814 68,824 44,309

Total Assets ($) 66,025 65,752 39,844 18,245 9,434

Book Value ($) 37,988 30,916 22,669 8,443 4,978

Revenues ($) 23,335 29,136 28,811 14,118 7,764

Percentage Block Size 7.9% 9.9% 10.1% 9.4% 12.4%

MTB Ratio 3.5 3.9 3.7 5.8 6.0

Volatility 68.3% 67.5% 71.8% 80.2% 104.2%

Price Per Share $12.49 $11.07 $12.02 $8.15 $8.17



1980 – 2008 (No Premiums or Registration Rights, 372 Count*)

* From this point forward, all tables and graphs are derived from the above data set, which excludes all private placement transactions where premiums were paid for restricted shares or which included registration rights.

Quintile 1 2 3 4 5

Discount 4.8% 12.2% 20.1% 31.2% 47.7%Market Value ($) 166,133 152,422 86,672 68,603 39,343Volatility 71.0% 68.8% 70.8% 84.5% 109.5%MTB Ratio 3.24 4.70 4.52 7.95 6.62Totals Assets ($) 68,014 50,368 28,521 13,083 8,649Book Value ($) 41,941 30,381 14,992 6,460 4,246Revenues ($) 18,011 18,461 17,190 6,818 4,720Percentage Block Size 8.0% 9.3% 9.5% 5.8% 14.2%Price Per Share $12.45 $13.04 $10.23 $7.88 $8.36



1980 – February 1997 (Two-Year Holding Period)

Quintile 1 2 3 4 5

Discount 4.8% 13.0% 21.0% 31.2% 43.2%Market Value ($) 162,682 99,531 86,468 69,045 35,532Volatility 56.5% 58.4% 69.2% 77.4% 96.0%MTB Ratio 4.02 3.99 4.57 6.79 7.92Total Assets ($) 72,452 36,480 22,129 17,180 8,684Book Value ($) 39,751 22,069 14,386 7,262 5,233Revenues ($) 28,237 35,927 16,698 17,364 7,576Percentage Block Size 11.3% 9.0% 10.4% 8.3% 15.4%Price per Share $14.63 $15.23 $10.51 $9.90 $9.87



Quintile 1 2 3 4 5

Discount 6.0% 17.6% 27.8% 42.5% 63.2%Market Value ($) 176,862 70,784 61,450 42,709 44,066Volatility 82.0% 80.8% 106.3% 121.0% 151.2%MTB Ratio 2.59 6.71 9.31 4.39 2.09Total Assets ($) 61,136 23,686 9,674 10,103 4,871Book Value ($) 46,080 9,763 7,566 4,724 978Revenues ($) 9,137 8,329 2,152 3,995 1,818Percentage Block Size 6.6% 8.8% 5.2% 7.6% 16.4%Price per Share $9.67 $6.95 $6.58 $7.76 $8.19

March 1997 - 2001 (One-Year Holding Period)



Quintile 1 2 3 4 5


2002 – November 15, 2007 (One-Year Holding Period)




Quintile 1 2 3 4 5



Dispersion of Data by Year

Time PeriodNo. of

Transactions Market Value Book Value VolatilityMedian Discount

2008 9 62,605 21,121 72.7% 16.7%2006-07 9 809,794 56,990 68.5% 9.1%2004-05 38 167,460 30,916 64.7% 12.0%2002-03 33 138,712 20,380 75.8% 16.5%2000-01 32 103,117 4,724 117.0% 30.4%1998-99 53 48,786 8,161 106.3% 27.9%1996-97 25 47,969 9,733 67.0% 17.8%1994-95 45 90,865 12,113 77.5% 21.0%1992-93 49 76,307 5,070 67.0% 24.8%1990-91 21 107,489 12,599 63.0% 14.5%1988-89 9 131,239 2,668 86.0% 15.8%1986-87 20 40,297 7,195 73.0% 21.8%1984-85 15 84,931 24,115 54.3% 23.8%1982-83 10 124,535 19,404 77.5% 20.7%1980-81 4 70,772 17,557 66.0% 31.0%

Pre - March 1, 1997 196 82,441 10,082 71.2% 21.0%March 1, 1997 - Nov. 15, 2007 165 95,642 12,196 86.4% 20.5%Post - Nov. 16, 2007 11 62,605 21,121 72.7% 15.0%


Dispersion of Data by SIC Code

1980 – 2008

SIC RANGE 1000s 2000s 3000s 4000s 5000s 6000s 7000s 8000s

No. of Transactions 41 45 103 25 16 40 67 35Median Market Value 97,076 150,849 70,335 146,896 55,844 112,384 50,446 104,461Median Revenues 13,877 7,008 10,475 23,543 47,970 52,931 4,909 13,329Median MTB Ratio 3.1 5.0 5.1 8.9 4.3 1.7 6.3 6.1Median Volatility 72% 73% 78% 85% 59% 47% 111% 73%Average Discount 20% 22% 25% 22% 13% 21% 31% 25%Median Discount 15% 16% 22% 18% 13% 16% 28% 25%


Dispersion of Data by Volatility

1980 – 2008




Dispersion of Data by Volatility

March 1997 – November 15, 2007 (One-Year Holding Period)




Dispersion of Data by Market Value with Volatility

Market Value: 1980-2008

0%

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Top Quintile Second Quintile Third Quintile Fourth Quintile Bottom Quintile

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Median Volatility


Dispersion of Data by Revenues with Volatility

Revenues: 1980-2008

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Median Volatility


Dispersion of Data by Total Assets with Volatility

Total Assets: 1980-2008

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Med

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Median Volatility


Dispersion of Data by Shareholders’ Equity

1980 – 2008

Shareholders’ Equity ($ Mil) DiscountHigh Low Average High Low Average Median

Top Decile 1,417.17 93.30 320.96 53.2% 0.0% 15.8% 12.8%Top Quintile 1,417.17 51.84 194.14 56.6% 0.0% 14.1% 11.3%Second Quintile 51.53 20.10 35.02 84.3% 0.0% 18.6% 14.9%Third Quintile 20.02 7.26 12.03 91.3% 0.0% 25.2% 23.7%Fourth Quintile 7.22 2.21 4.56 70.0% 2.3% 31.3% 33.3%Bottom Quintile 2.18 (93.16) (2.98) 81.0% 0.0% 30.8% 27.3%Bottom Decile 0.26 (93.16) (7.39) 81.0% 3.0% 30.1% 27.3%


Dispersion of Data by Price Per Share with Volatility

Price Per Share: 1980-2008

0%

5%

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25%

30%


Med

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Median Volatility



Price Per Share: 1980-February 1997(Two-Year Holding Period)

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Price Per Share: March 1997-November 15, 2007(One-Year Holding Period)

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Dispersion of Data by Net Income with Volatility

Net Income: 1980-2008

0%

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Median Volatility


Dispersion of Data by Net Income Margin

1980 – 2008

Net Income Margin DiscountHigh Low Average High Low Average Median

Top Decile 536.4% 8.5% 37.0% 84.3% 0.0% 19.7% 12.7%Top Quintile 536.4% 3.8% 21.7% 84.3% 0.0% 20.5% 15.9%Second Quintile 3.8% (6.6%) (0.3%) 91.3% 2.3% 23.1% 17.5%Third Quintile (6.9%) (56.6%) (27.1%) 62.4% 0.0% 23.3% 21.0%Fourth Quintile (57.1%) (276.1%) (148.7%) 72.4% 1.0% 26.1% 23.6%Bottom Quintile (321.6%) (121,640.7%) (5,717.9%) 81.0% 1.7% 29.1% 26.9%Bottom Decile (1,108.4%) (121,640.7%) (10,807.8%) 65.4% 1.7% 26.2% 27.8%




Top Decile 536.4% 3.6% 87.0% 69.2% 4.6% 33.3% 17.8%Top Quintile 536.4% (8.0%) 40.0% 91.3% 0.0% 34.1% 24.2%Second Quintile (11.1%) (51.8%) (31.0%) 49.7% 0.0% 21.8% 19.3%Third Quintile (56.6%) (182.6%) (115.2%) 70.0% 1.9% 26.8% 24.5%Fourth Quintile (198.3%) (792.5%) (480.5%) 81.0% 11.0% 49.5% 57.6%Bottom Quintile (885.3%) (58,225.0%) (6,675.6%) 65.4% 6.0% 36.2% 32.1%Bottom Decile (2,337.8%) (58,225.0%) (13,026.9%) 54.5% 6.0% 37.7% 45.7%




2002–November 15, 2007 (One-Year Holding Period)


Top Decile 160.1% 13.6% 41.1% 84.3% 1.7% 25.5% 16.5%Top Quintile 160.1% 2.8% 23.5% 84.3% 1.7% 20.5% 15.9%Second Quintile 2.0% (20.0%) (6.5%) 52.8% 2.8% 18.7% 15.4%Third Quintile (25.7%) (107.0%) (60.1%) 42.9% 1.6% 19.6% 17.6%Fourth Quintile (124.5%) (548.9%) (220.3%) 33.7% 4.3% 13.2% 11.7%Bottom Quintile (644.6%) (121,640.7%) (11,273.3%) 41.9% 4.6% 16.3% 10.4%Bottom Decile (2,452.9%) (121,640.7%) (22,778.4%) 41.9% 5.5% 22.7% 17.8%


Dispersion of Data by Dividends

Dividends: 1980 - 2008

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Dividend No Dividend

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Median Discount

Median Volatility



Dividends: 1980 - February 1997 (Two-Year Holding Period)

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Median Volatility



Dividends: March 1997 - November 15, 2007(One-Year Holding Period)

0.0%

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25.0%


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100.0%

Me

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Median Discount

Median Volatility


Dispersion of Data by Z-Score

Z-Score: 1980 - November 15, 2007

0.0%

5.0%

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20.0%

25.0%

30.0%


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Me

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yMedian Discount

Median Volatility


Dispersion of Data by $-Block

$ Block: 1980-2008

0%

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30%

35%


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Median Volatility


Dispersion of Data by %-Block

0%

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15%

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30%

35%

40%

45%

50%

Dis

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Lower than 20% Greater than 20% Greater than 25% Greater than 30% Greater than 35%

Block Size v. Discount: 1980-2008

Average Discount

Median Discount


Dispersion of Data by %-Block

0%

10%

20%

30%

40%

50%

60%

Dis

co

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t

Lower than 20% Greater than 20% Greater than 25% Greater than 30% Greater than 35%

Block Size v. Discount: 1980-February 1997(Two-Year Holding Period)

Average Discount

Median Discount


Dispersion of Data by Rule 144 Initial Holding Period

Dispersion of Data by Rule 144 Initial Holding Period (Block Size <20%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

6 Months Reg Rights Only 6 Months No Reg Rights 1 Year 2 Years

Med

ian

Dis

cou

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Median Discount


Dispersion of Data by Rule 144 Initial Holding Period

The Data Suggests that when the Holding Period Increases the Per Month Percentage Discount Increases:

1.5 months to Six Months = 0.44 pts. Six Months to One Year = 0.72 pts. One Year to Two Years = 0.27 pts. 1.5 months to Two Years = 0.42 pts.


Dispersion of Data by Market Volatility (VIX)


VIX 6-Month

Average

Low High

Top Decile 28.53 - 32.87 29.6 6.9% 27.8 2.9 32.1% 42.7%Top Quintile 25.75 - 32.87 28.5 8.1% 27.7 2.8 26.9% 19.6%Second Quintile 23.33 - 25.74 24.3 7.2% 39.2 3.5 25.0% 11.1%

Middle Quintile 17.52 - 23.33 22.2 9.6% 39.5 3.5 22.5% 0.0%


MedianTrans.

Discount

MultiplicativeAdj. Factor

From MiddleQuintile

PercentSharesPlaced

MarketValue

MTBRatio

MedianVIX


Dispersion of Data by Market Volatility (VIX)

The Data Suggests that for each VIX Point above 22.2 Points, the Discount should Increase by 0.7 to 1.3 points.


Summary FMV Study Findings

The Discount for Lack of Marketability is:

Negatively correlated with the market value of the subject entity; the subject entity’s revenues; the earnings and net profit margin of the subject

entity; the dividend payout ratio of the subject entity; the total assets of the subject entity; the book value of shareholders’ equity of the

subject entity;

List continued…


Summary FMV Study Findings

The Discount for Lack of Marketability is:

Negatively correlated with (cont.) the subject entity’s stock price per share; the trading volume of the subject entity’s stock; and the size of the block sold (dollar value).

Positively correlated with the subject entity’s market-to-book ratio (market value divided

by book value); the subject entity’s unrestricted stock price volatility; the subject block size relative to the trading volume of the

stock; the block size, described as a percent of the total ownership;

and the level of forward-looking market volatility (VIX).


What not to do!

Ascribe a Holding Period to the Private Company/FLP


“…the Court finds it is inappropriate to assume a particular holding period for the hypothetical willing buyer.”


What not to do!

Use the Average Discount of the Restricted Stock Study


“Rather than taking restricted stock sale data and explaining its relation to the gifted interests, [the Taxpayer’s expert] simply listed the studies and picked a discount based on the range of numbers in the studies.”


Other Considerations

Cash-on-Cash Dividend Yield Saleability:

Ego Satisfaction (Sports Franchise) $ Size of Block v. Cost of Due Diligence

Depth/Age of Key Management Economic Cycle M&A Cycle/Demand in Industry Prior Transactions Fifth Quintile Combinations



Cash-on-Cash Dividend Yield

Liquidity represents the ease of turning an asset into cash. For publicly traded stock, this typically occurs through the sale of the securities for cash. However, a portion of a stock value may be related to its dividend-paying capacity. If a private company pays significant distributions to shareholders, much of the value of the stock is received in cash by shareholders on a regular basis, with the remaining value associated with the appreciation of the business (generally, the higher the distribution payout ratio, the lower the appreciation of the business, as faster-growing firms retain greater portions of net income and reemploy such retained capital for future growth). Before adjusting for private v. public, in cases of high distribution payout ratios, the lack-of-marketability discount should be smaller than the discount indications from the most illiquid restricted stock in the FMV Study, since such blocks are generally non dividend-paying.



Saleability:

Ego Satisfaction (Sports Franchise)

The marketability of certain assets may be significantly improved by the “sex appeal” of owning such assets. Minority interests in professional sports franchises or movie studies, for example, have historically not followed trends demonstrated by broader private equitiy markets. Due to the wide appeal of owning such assets, there seems to generally exist greater demand for such assets relative to typical interests in private firms. Appraisers must consider the relative ease of finding a buyer for an interest when determining the discount for lack of marketability.



Saleability:

$ Block Size v. Cost of Due Diligence

All else equal, a small dollar-value position in a private firm may be significantly more difficult to dispose of. This is due to the high cost of due diligence in any private transaction, which represents a substantial portion of the total cost of purchasing a small dollar-value interest. Purchasers of such interests therefore demand greater discounts to compensate them for this high percentage cost. This phenomenon is demonstrated clearly in the FMV Study of restricted stock transactions, where the smallest dollar-value blocks are sold at significantly greater discounts than more typical-sized blocks.



Depth/Age of Key Management

While the strength and remaining tenure of a private company’s management team may reduce the risk of a minority investment in the firm, it may also inversely impact the discount for lack of marketability. A weak management team, or the lack of an adequate succession plan, may increase the probability of the controlling shareholder(s) seeking a sale or merger, which may provide an opportunity for liquidity for minority shareholders.



Economic Cycle

Comparing a subject interest to the restricted stock in the FMV Study, which has been compiled over a 26-year period, results in an indication of the lack-of-marketability discount that would apply in a relatively normal economic cycle. Generally, weak economic climates are accompanied by poorer performance of companies, less access to capital and weaker demand for equity investments, including minority interests in private firms. Alternatively, when economies are booming and high levels of capital are seeking investment at high valuations, the marketability of equity interests, including minority interests in private firms, is improved.



M&A Cycle/Demand in Industry

Comparing a subject interest to the most illiquid restricted stock in the FMV Study implies that the most reasonable expectation for liquidity of the interest is through a sale to a private investor. However, in certain instances there may exist a significant probability that the subject company will experience a liquidity event in the foreseeable future, such as an initial public offering, merger or acquisition. In such event, a holder of the subject interest may receive cash or other liquid securities, the expectation of which could result in a significant downward adjustment to the indicated discount for lack of marketability.



Prior Transactions

Prior transactions in the stock of a subject company may not only provide indications of value for the subject interest, but also may provide clues as to the existence of a “market” for a particular interest. In certain private firms, for example, there may be many, if not hundreds or even thousands of shareholders, some of which may at any point in time be interested in increasing their ownership position. If there has been a history of trading activity in the stock of a private company, the liquidity of the subject interest should be considered greater than the most illiquid restricted stock in the FMV Study and, in some cases, may be greater than small blocks of stock in the FMV Study which are subject to a one- or two-year holding period.



Fifth Quintile Combinations

The comparative analysis for determining the Restricted Stock Equivalent Discount begins by examining the discounts associated with transactions in the stock of companies with similar financial characteristics to the subject company. For each characteristic, the subject company is placed into the appropriate quintile of companies in the FMV Study, and the discount for the subject company is indicated as the median discount for that sample of transactions. However, this analysis does not fully account for the risk of a company that consistently falls in the most risky quintiles. For example, the subject company may fall into the fifth quintile when sorted by market value, indicating it is among the riskiest firms in this respect. However, many of the FMV Study companies in this quintile may exhibit significantly less risky characteristics for other variables, such as market-to-book ratio, profitability or dividend policy. Accordingly, the median discount for firms in the fifth quintile with respect to market value (not necessarily the most risky firms overall) is lower than what would be expected for firms that consistently fall into the most risky quintiles. If a subject quintile repeatedly demonstrates high-risk financial characteristics, the appropriate Restricted Stock Equivalent Discount should be greater than that indicated by the weighted average of the discounts based on financial characteristics.


HOW TO USE THE RESTRICTED STOCK DATA


A New Valuation Framework


The FMV DLOM Model

NOTE: The Illiquidity of Large Rule 144 Restricted Stock Blocks are More Similar to the Illiquidity of Private Equity Minority Interests of Any Size Block. (i.e., the Illiquidity of a 1% Private Equity Block is More Akin to the Illiquidity of Rule 144 Large Blocks than 1% Blocks of Rule 144 Stock.)


The FMV DLOM Model

Restricted Stock

Equivalent Discount

Private Company Discount

+ =RED RED

LBI

Large-Block

Discount Increment

LBI RED

LBI

+ MVA

MarketVolatility

Adjustment

=

DiscountConclusion

MVA


FMV Model Applicability

Private Equity Affiliate and Insider Stock Stock with Very Long Contractual

Lock-ups


Are The FMV Study Stocks Hedgeable?

What are the criteria for a hedgeable position?1. Stock Price greater than $102. Block Size less than 3 days’ volume3. Market Value more than $500 million

FMV Study 233 transactions pass first test 26 transactions pass second test 47 transactions pass third test

Only 4 transactions pass all three tests


Are The FMV Study Stocks Hedgeable?

Don’t use a Hedging Model if it can’t Really be Accomplished

“…because the [option] collar relied on real world variables, it cannot be considered purely theoretical. The size of the HRN restricted stock, as compared to the public float, render such a transaction impossible as a practical matter.” Litman v. U.S. – Court of Federal Claims, Nos. 05-956T, 05-971T and 06-285T (August 22, 2007); also see, Estate of Murphy – USDC WD Ark., Case 1:07-cv-01013-HFB (October 2, 2009)


Summary and Conclusions

First-hand data is more defendable than third-party studies—anytime!

Detailed restricted stock studies remain best available evidence

Discount averages are almost meaningless

Discount analysis is three parts Restricted Stock Equivalent Large Block Increment Market Volatility Adjustment


Summary and Conclusions (cont.)

Stock volatility significant factor Analysis should consider relevant

company characteristics Industry not very significant Discount should be significantly higher for:

Private equity Large blocks Insiders and Affiliates Very long contractual lock-ups Periods of high stock market volatility


Case Study

ABC Corporation


Case Study (cont.)

FACTS ABC Corp. is a closely held corporation. Subject Interest = 1% of the outstanding common stock of ABC

Corp. Valuation Date = November 28, 2008. 25 shareholders total, with largest shareholder owning less than

10%. No shareholders’ agreement or restrictions on sale of minority

interests. Future dividends unlikely (management intends to reinvest

profits). No recent offers to buy or sell and no potential for IPO. Marketable Minority (Public Company Equivalent) Value for ABC

Corp. determined to be $20 million.


Case Study (cont.)

Methodology 1. Determine the Restricted Stock Equivalent Discount

(RSED) based on a financial/risk comparison with companies in the FMV Study.

2. Calculate the Private Equity Discount (PED) based on the large block/small block comparison.

3. Calculate the Market Volatility Adjustment Factor (MVA) based on restricted stock discounts in periods of high market volatility.

4. Consider relevant additional factors.


Case Study (cont.)Restricted Stock Equivalent Discount Analysis1

(1) Financial Characteristic Comparison Analysis2 Company FMV Study Discount SelectedTraits Quintile/Decile Indication Weight

Size Market Value ($mm) 20.0 5 24.1% 2 Revenues ($mm) 50.0 2 15.1% 1 Assets ($mm) 14.3 4 23.4% 2Balance Sheet Risk Book Value ($mm) 5.7 4 27.8% 2 MTB Ratio 4.0 3 16.2% 3Profitability Net Income ($mm) 1.0 2 17.8% 1 Net Profit Margin 2.0% 2 15.3% 2Dividends (Y = yes, N = no) N N 16.7% 1

Restricted Stock Equivalent Discount Indication 20.0%

(2) Best Comparables Analysis

Number of Matches 4 - Exact 3 - Exact 4 - Close 3 - Close

Median Discount 21.7% 27.1% 18.4% 23.1%Transaction Count 2 19 48 171

Selected Restricted Stock Equivalent Discount 20.0%

(1) Excludes transactions with "% Shares Placed" > 20%. Transaction set includes 514 transactionsbetween July 1, 1980 and December 31, 2008.

(2) Bolded variables are included in the Best Comparables Analysis.


Case Study (cont.)

Private Equity Discount Analysis1

Percent Trailing Median Adjustment FactorsShares Trans. Market MTB 12-Month Trans.Placed Count Value Ratio Volatility Discount Additive Mult.

< 20% 211 $25.9 4.6 79.2% 23.8%

> 20% 43 18.5 3.1 85.7% 34.5% 10.7% 1.45> 25% 23 18.3 2.8 67.8% 38.5% 14.7% 1.62> 30% 14 14.3 2.8 76.1% 44.8% 21.0% 1.88> 35% 7 18.3 8.4 68.1% 48.6% 24.8% 2.04

> 35%2 6 13.6 6.7 80.8% 52.6% 28.8% 2.21

> 35%3 4 23.8 3.3 80.8% 52.6% 28.8% 2.21

(1) Excludes transactions with "Market Value" > $100 million and those with registration rights. Transaction set includes 211 transactions between July 1980 and December 31, 2008.

(2) MTB Ratio less than 15.(3) MTB Ratio less than 10.


Case Study (cont.)

The Private Equity Discount Range is calculated by applying the additive and multiplicative adjustment factors (see previous page) to the selected Restricted Stock Equivalent Discount.

Private Equity Discount Application

Adjustment Factor Analysis Low Mid High

Adjustment Factor Range Additive 11.0% 20.0% 29.0%Mult. 1.50 1.90 2.20

Selected Restricted Stock Equivalent Discount 20.0%

Indicated Private Equity Discount Range Additive 31.0% 40.0% 49.0%Mult. 30.0% 38.0% 44.0%

Average 30.5% 39.0% 46.5%

Selected Private Equity Discount 40.0%


Case Study (cont.)

The Multiplicative Adjustment Factors are calculated based on the difference between the median discount from each VIX group and the bottom group (22.5% discount), which represents the median discount for the entire transaction set used in this analysis.


Low High

28.53 - 32.87 6.9% 27.8 2.9 32.1% 42.7%25.75 - 32.87 8.1% 27.7 2.8 26.9% 19.6%23.33 - 25.74 7.2% 39.2 3.5 25.0% 11.1%

17.52 - 23.33 9.6% 39.5 3.5 22.5% 0.0%


MarketValue

MTBRatio

VIX 6-Month

Average MultiplicativeAdj. Factor

PercentSharesPlaced

MedianTrans.

Discount


Case Study (cont.)

For this analysis, we have assumed there are no additional factors regarding the Subject Interest that would warrant an adjustment to the indicated discount for lack of marketability.

Market Volatility Adjustment and Discount Conclusion

Market Volatility Adjustment Analysis

Trailing 6-Month VIX as of November 2, 2008 36.45Selected Market Volatility Adjustment Factor 40.0%

Selected Private Equity Discount 40.0%Times: 1 Plus Selected Market Volatility Adjustment Factor 140.0%

Adjusted Total Discount Indication 56.0%

Plus: Adjustment for Additional Factors 0.0%

Discount for Lack of Marketability Conclusion 55.0%


Speaker Biography

Lance S. Hall, ASA is Co-Founder and President of FMV Opinions, Inc. Mr. Hall also supervises the firm’s New York office. A prolific author and expert witness, Mr. Hall is a highly sought after speaker known for his exciting, dynamic and informative presentations. Mr. Hall is an Accredited Senior Appraiser of the American Society of Appraisers, and earned his MBA from Brigham Young University. Mr. Hall also sits on the Editorial Advisory Board of Business Valuation Update, and writes a regular column for Valuation Strategies and The Journal of Practical Estate Planning magazines.

Documents

© 2009 FMV Opinions, Inc., All Rights Reserved | Questions: [email protected] Looking at the New Data in The FMV Restricted Stock Study™ and