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The best mathematical models for Discounts for Lack of Marketability (DLOM) (Part 2)

Today's post is by Andrew Strickland of Scrutton Bland, Chartered Accountants. Andrew specialises in corporate finance and business valuation. Andrew is a member of the Valuation Committee of the ICAEW and its subject matter expert. Andrew has undertaken a large number of business valuation assignments in respect of shareholder disputes and also in respect of divorce. He also works on fiscal valuations for a variety of tax purposes.

The Chaffe Protective Put Option Model

Chaffe came up with the main thought that applies to most of these models.

The thought was an important one:

An illiquid stock bundled with a put option, equals an otherwise identical liquid stock. Therefore, a liquid stock less the cost of the put option equals the otherwise identical illiquid stock.

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