Business Valuation Review Volume 40: Issue 2

Although there is relevant evidence in some restricted stock studies that can be helpful for marketability discount determinations, comparisons with average discount observations from these studies do not provide a meaningful methodology to estimate marketability discounts. We conclude this despite the fact that too many valuation analysts continue to rely on simplistic comparisons with averages of restricted stock discounts from dated studies in their marketability discount determinations.

This article posits that using the arithmetic mean to average multiples is mathematically inferior. A multiple is an inverted ratio with price in the numerator. The harmonic mean is a statistically sound method for averaging inverted ratios. It should be used as a measure of central tendency for multiples, along with the median. Empirically, the harmonic mean and the median of a set of multiples are usually similar. Because the harmonic mean can be overly affected by abnormally low multiples, the valuator must use judgment to exclude outliers.

Attrition analysis is widely used by valuation professionals as a recognized method to forecast customer population retirement behavior. With attrition analysis, an expected customer population retirement profile is developed through the study of historical customer retirement activity and applied to the customer population when valuing customer relationship intangible assets. As a frequent reviewer of customer relationship valuations, valuation practitioners regularly develop an attrition analysis founded on a midperiod retirement convention but then apply an end of period convention when forecasting customer retirements. Since attrition analysis relies on midperiod retirement convention and the exponential distribution, analytical consistency is maintained when a midperiod retirement convention is used to forecast customer retirement behavior for the valuation of customer relationship intangible assets.

Today, there are many fine business valuation textbooks available to the professional business appraiser for guidance and support. The purpose of these publications is to equip the readers with the methodology, techniques and models necessary to produce a credible valuation opinion and report.

One of the resources now available to the business appraiser is the recently published third edition of Business Valuation: An Integrated Theory (BVIT) by Z. Christopher Mercer and Travis W. Harms. While BVIT is also general business valuation textbook, one element which separates this treatise from the others is its emphasis

From the Editor

A Current View of the Restricted Stock Studies and Restricted Stock Discounts

When Averaging Multiples, the Arithmetic Mean Is Inferior to the Harmonic Mean

Attrition Analysis, Midperiod Convention and Customer Retirement Forecasts

Business Valuation: An Integrated Theory (BVIT)

From the Chair

Volume 40, No. 2 — Complete Issue

From the Editor

Customer Concentration: Good, Bad, or Ugly?

From the Chair

Delaware Valuation Decisions, 2021 to 2024

Volume 44, No. 1 — Complete Issue