BLOCKAGE DISCOUNTS
Blockage discounts typically apply to public stock. Thinly traded stocks subject to blockage discounting are either pink sheet or over-the-counter bulletin board issues (OTCBB). These stocks have low liquidity, often comprising riskier investments. The companies represented include non-revenue or small income, and may be distressed or have financial difficulties. The OTCBB is an electronic trading service somewhat more regulated than the Pink Sheet.
Blockage discounts are influenced by the following:
- Market Liquidity – More liquid stocks typically require lower discounts.
- Size of the Block – Larger blocks relative to average daily trading volume involve higher discounts.
- Holding Restrictions – Restricted shares or shares subject to lock-up agreements may also face higher discounts.
- Market Conditions – Volatile or bearish market conditions can increase the discount.
- Buyer Demand – The presence of interested institutional buyers might reduce the need for a steep discount.
To determine a reduction in value for the anticipated sale of a relatively large number of shares is a specific process. It encompasses analyzing the following:
- Average trading volume for least 30 days
- How the above trading has statistically affected the stock price
- The number of days to “dribble out” the total shares held versus the amount of total outstanding shares
- The present value of collecting funds from a sale
- Use of the option pricing model to “collar” the low to high price range
Blockage discounts may include a large range, from 5 to 50%, Thus, it is imperative that a valuation expert be employed to support an accurate calculation.