Blockage discounts: Size counts in certain stock valuations

When valuing large blocks of publicly traded stock, business valuation professionals sometimes apply a “blockage discount.” This adjustment reflects the decrease in the per-share value of a block of stock that’s so large it couldn’t be sold in a reasonable period given normal trading volume.

What’s the rationale behind this discount? If a block of shares is large relative to the number of outstanding shares or the normal trading volume for that company’s shares, the shares may not be suitably liquid. Selling the entire block in a short time period will likely depress the market price. Conversely, “dribbling out” the block of shares over an extended period makes the seller vulnerable to daily price fluctuations. A “hypothetical willing buyer,” therefore, would demand a lower price than the market price.

Factors to consider

Not every block of public stock is a candidate for a blockage discount. When determining whether a discount should be applied, valuation pros assess the following factors:

• The size of the block compared with the total outstanding shares,
• The size of the block compared with the stock’s normal daily, monthly, quarterly and annual trading volume,
• The size of the block compared with the stock “float” (the amount of stock available for market trading),
• Historic dividends,
• The existence of resale restrictions on the block,
• The volatility of the company’s stock price,
• Recent trends in the stock price,
• Projected earnings for the company,
• The company’s current economic outlook,
• General economic trends,
• The effects of previous high-volume transactions,
• The stock exchange where the stock trades, and
• Selling costs.

Depending on the situation, some factors may not be relevant or have more or less weight than others.

Quantifying the discount

If a valuator decides that a blockage discount is appropriate, he or she will estimate the discount amount. It should account for the difference between the hypothetical sales price (or prices) and the actual trading price on the valuation date.

Experts typically base their estimates on an assumed disposition method. For example, a large block of stock could be sold through a secondary public offering, a full or partial stock redemption with the subject company, or a private placement transaction. It could also be disposed of by dribbling out the shares in small lots in public markets over a period of time.

For more information

The specific facts and circumstances surrounding a block of stock — including company, industry and economic factors — will determine whether a blockage discount applies. If one does, the best approach is to apply multiple calculation methods and reach an overall discount. Contact us for help estimating a reliable valuation for your circumstances.

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