Recent Court decisions require that S Corp shareholders and their advisors reconsider how the value of their S corps are determined. We provide three methods of quantifying the differences between S corps and C corps based on the facts and circumstances of the specific company.

Unlike stock in publicly traded companies, stock in privately held businesses is generally not accepted by banks as loan collateral. The inability to use privately held stock as collateral imposes an opportunity cost on the stockholder. This opportunity cost is one component of a lack of marketability discount that can be objectively quantified without reference to restricted stock studies, pre-IPO studies or assumptions regarding holding periods. The opportunity cost of owning an asset that cannot be used as collateral applies equally to nonmarketable interests in C corporations, S corporations, partnerships and limited liability companies.

Academic research suggests that the size of the marketability discount is in the neighborhood of 13.5c/c and more recent work has suggested it may he as low-as 7.23%. The regression models of Silber, and Hertzel and Smith have provided both the intellectual and empirical basis for these conclusions. These models were initially developed to study the determinants of the marketability discount. It has been suggested that they should now be used as a basis for forecasting the marketability discount. This paper demonstrates that these models should not be used for this purpose because the forecast errors are likely to be large. Moreover, based on the structure of these models and their prediction errors, it is not possible to state with any certainty that a 13.5% marketability discount is statistically different than a discount of say 25%.