Metodyka szacowania dyskonta z tytułu braku płynności i ograniczonej zbywalności w wycenie przedsiębiorstw
Authors: Czerwiński Mateusz 
Published: August 2024

Illiquidity discount and lack of marketability discount: methodological aspects in business valuation
Enterprises, like many other economic goods, are traded on the market. Trade in enterprises is de facto the purchase or sale of ownership rights, which, depending on their legal form, have the status of shares. The market for public limited companies is the stock exchange, where the current market valuation of companies is carried out. However, there are a significant number of non-listed companies on the stock exchange and companies with different organizational and legal forms (e.g., cooperatives, municipal enterprises, and public institutions). In these cases, the need to obtain certain estimates of the enterprise value &ndash; the subject of the transaction &ndash; is obvious. Moreover, even companies listed on the stock exchange, more often than could be assumed, require OTC value estimates. And f inally, the last general premise of valuation &ndash; still underestimated in practice despite strong support in theory &ndash; is the measurement of value in relation to the current company management, planning of its development, or possible divestment of owners. The condition for efficient implementation of these processes is the possibility of using the support of experts specializing in the valuation of enterprises. Despite the fact that Poland is still at an early stage of market economic development, it is no exception in this respect.
Enterprise valuation has an important role in shaping the capital flows in the Polish economy. The services of specialists in this field are used by the government and local government in privatization and commercialization processes, state capital funds, private entrepreneurs raising capital for development or selling businesses, as well as the common judiciary in the appointment of experts to support the issue of judgments. Demand for valuation services is high and very diverse, which results in specific problems faced by valuers. Among the subjects that are particularly controversial is the use of value adjustments in the valuation of rights to enterprises that are not public companies.
The controversy surrounding the inclusion of market liquidity in the methodology of estimating value from the perspective of a specific investor makes it one of the most frequently discussed issues in the field of enterprise valuation. It is not enough to state that the value of a company is determined by the sum of cash flows possible to obtain from its ownership because such a definition is based on a model that does not take into account limitations in transactions. In practice, there are a number of barriers that affect the ability to immediately dispose of an economic good (including a business) with a fair value. The source of reduced liquidity for enterprises may be market processes observed at a given moment or specific actions of a legal nature. Therefore, a distinction is made between adjustments due to the merchantability, saleability, and marketability of companies (illiquidity discount) and adjustments representing the inner characteristics of equity, which, in combination with the law on trading in financial instruments, limit the possibility of entering into purchase or sell transactions (discounts for lack of marketability). Thus, the methodology of private company discounts is a multithreaded issue.
The main purpose of this dissertation is an in-depth analysis of theoretical premises justifying the application of value adjustments to private enterprises, as well as an assessment of the possibility of applying the solutions proposed in this aspect in developed countries in relation to the Polish market. The specific objectives of this paper are both theoretical and empirical. The first group includes (P1) analysis, synthesis, and classification of world scientific achievements in the field of value adjustments due to a lack of liquidity and limited transferability in the valuation of enterprises, as well as (P2) identification of factors determining the scale of such adjustments in developed markets. Moreover, the aim of this dissertation is (P3) to verify, using qualitative and quantitative methods, the validity of applying in Polish conditions the discount for lack of liquidity or the discount for limited transferability, and (P4) to propose original methodological solutions, including the application of these adjustments in the process of enterprise valuation. The result of the conducted considerations, set objectives, and author&rsquo;s reflections is the main hypothesis, according to which (H1) the application of value adjustment to the enterprise due to a lack of liquidity or limited transferability is determined by factors related to the legal environment in which the valuation is conducted as well as the financial and organizational characteristics of the valued enterprise. A supplementary hypothesis of this paper is the assumption that (H2) the methodological solutions used on the developed markets in terms of defining, measuring, and applying discounts due to a lack of liquidity and limited transferability require adjustment to Polish conditions.
The dissertation consists of five chapters with conclusions and proposals for further research. The first chapter is devoted to theoretical considerations on the valuation of enterprises as a sub-discipline of economic sciences. The next chapter contains a systematic description of the world&rsquo;s scientific achievements in the field of value adjustments for lack of liquidity and limited transferability in enterprise valuation. This chapter contains an extended presentation of the concept of value levels, a review of the definitions of the discount categories in question, and the origins of introducing this issue to the valuation of enterprises. The considerations are mainly focused on the scientific and practical achievements of the American market, as it is perceived as the most developed and exemplary in the area of enterprise valuation. A detailed analysis of methodological solutions functioning on this market confirms how multithreaded and ambiguous the adjustment of the value of non-public enterprises is.
The third and fourth chapters are of a methodological and cognitive nature. They provide an overview of research on estimating value adjustments for limited transferability (Chapter 3) and lack of liquidity (Chapter 4). The analysis is limited to the approaches most frequently cited in the literature using restricted stocks, initial public offerings, transaction multipliers, and other methods considered non-standard. These considerations are continued in Chapter 5, where the reference point is the practice of company valuation in Poland. Altogether, these chapters support the verification of the main hypothesis of this paper.
The attempt made in this paper to demonstrate the relations between the limited transferability of economic goods and the scale of market liquidity, as well as their impact on the valuation of non-public enterprises, is the first known to the author. Comparing studies on limited transferability discount and illiquidity discount, significant differences in the methodology used can be observed. Above all, these adjustments are estimated using different economic dependencies. Some authors compare the value of temporarily restricted shares in public sales with shares in the same company that are not subject to transferability restrictions, while the other group of researchers conducts a regression of the transaction multipliers observed in two different markets and calculates the implied discount. In the case of the first group, the key factor determining the level of discount is the time until the expiry of restrictions on trading in shares in the public market, while for the second, the basic independent variable is the (permanent) non-public status of the company and its (temporary) economic and financial characteristics (H1). Studies on limited transferability and lack of liquidity in reality concern various phenomena, and therefore, in the author&rsquo;s opinion, their results should not be treated as identical.
However, the above does not exclude the fact that studies in this area help to approximate the discount in the valuation of private companies. The problem is mainly limited access to data on capital transactions carried out outside the public market and a lack of consensus at the definition level. If there are no reserved shares in Poland, no data is collected on the sale of shares in the period preceding their publication, and in the vast majority of takeovers of private companies, there is no disclosure of the price or other characteristics of the transaction. The only solution is to use data for other markets. The development of technology has meant that access to information on research results from developed markets is not currently a challenge, but their greater diversity may lead to abuse or confusion. A survey conducted among specialists providing valuation services confirmed that only in Poland does the discount for lack of liquidity have several meanings. Such a freedom of interpretation results, among others, from the different terminology used in particular countries and from the lack of strong standardization of the concept of enterprise valuation based on the accounting model. The key in the professionalization context of valuation services for enterprises in Poland and the aforementioned unification of the valuation process in detail is to distinguish between limited transferability and lack of liquidity.
Transferability is related to a specific asset subject to valuation and the assessment of the chances of its sale in a short period of time and at a price close to the result of the valuation of the reference value. The consequence of such recognition is the possibility of considering a situation where the transferability of a specific asset is temporarily restricted and it is necessary to take into account a certain discount to the reference value. The adjustment for limited transferability, being a monetary or percentage adjustment of the value of a block of shares, is intended to reflect the impossibility of carrying out the transaction in a manner appropriate for transferable goods, i.e., in a short period of time and at a minimum cost. An example of such restrictions in the US market is Rule 144, whereas in Poland there are restrictions of statutory, regulatory, and contractual nature, including various lock-ups.
However, when considering the valuation of companies that are not public companies, the issue of liquidity should be considered in the context of the market in which the transaction is to be carried out. Numerous studies carried out over the last two decades have shown that private company purchase and sale transactions are carried out at relatively lower prices than similar public market events. These studies are most often cited as empirical reasons for considering the private market as illiquid and as a determining factor in the practice of valuing the liquidity discount.
The distinction between the limited marketability discount postulated by the author, whose basic determinant is the time needed to carry out the transaction at a price close to the reference value, and the discount for lack of liquidity, representing the observed and expected irregularity of trade in similar enterprises, is an attempt to meet the specific legal and economic conditions existing in Poland (H2). The added value of this dissertation is the analysis of enterprise valuation as a form of agency contract, the proper organization of which may influence the evaluation of its transferability and thus the obtained benefits from the transaction.
The view on the valuation of private companies proposed in this paper goes beyond the existing achievements in the field of enterprise valuation but in no way resolves all doubts related to this subject. There is no doubt that a number of questions can be formulated that still remain unanswered. Is the sale of rights to a private company subject to the limited transferability of the company itself and/or the systematic illiquidity of the market in which the transaction is to be carried out? Or does the private market illiquidity discount express the non-participation of shares in the market and already take into account the aspect of limited transferability? Why is the private market considered illiquid (less liquid) when it has a different microstructure than organized markets and thus cannot be subject to liquidity measures specific to the public market? How do you explain the lack of private market liquidity in a situation of dynamic development of seed and venture capital funds, internet equity crowdfunding platforms, and decreasing interest from issuers in the public market?
Professionalization of valuation services still requires active discussion on the adequacy of methodological solutions applied in developed countries, in particular by valuation practitioners from the American market. The methodological assumptions proposed in this paper concerning the discount for lack of liquidity and the discount for limited transferability are not a flawless test, but they can be successfully used to improve the rules of valuation of enterprises in Poland.