The discount for lack of marketability (DLOM) is the adjustment applied to the value of a private-company or otherwise illiquid interest to reflect the cost and uncertainty of converting it into cash. Unlike a public minority share — which can be sold the same day at a quoted price — a private-company interest may take months or years to monetise, and only at an uncertain price.
Why it exists
Empirical evidence consistently finds that, all else equal, illiquid interests trade for less than economically equivalent liquid ones. The standard sources of evidence are:
- Restricted-stock studies. Public-company stock subject to Rule 144 restrictions has historically traded at discounts of ~15–35% to freely tradeable stock.
- Pre-IPO studies. Sales of private-company shares in the months before an IPO often occurred at substantial discounts to the eventual offering price, although these studies have been criticised for selection bias.
- Option-pricing models (e.g. Finnerty, Longstaff, Chaffe) frame the DLOM as the cost of a "look-back" or protective put over the expected illiquidity period.
How it is sized
There is no universal number. Practitioners size DLOM based on:
- Time to liquidity. A minority interest in a private operating company with no exit on the horizon supports a higher DLOM than one in a company already in a sale process.
- Distribution policy. Reliable cash distributions reduce the DLOM.
- Transfer restrictions. Buy-sell agreements, rights of first refusal and consent provisions increase the DLOM.
- Size of the stake. Larger stakes are harder to sell quickly.
Where it is applied
DLOM appears most often in:
- estate and gift tax valuations of family-business interests;
- buy-sell agreement pricing;
- 409A valuations of private-company common stock for stock-option grants;
- shareholder-dispute and dissenters'-rights cases (jurisdictions vary on whether DLOM is allowed in statutory fair value).
DLOM is typically applied on top of any minority discount and after the enterprise-level valuation; the two reflect different concepts and should be sized independently.
See also
- Minority discount — A reduction in per-share value applied to non-controlling stakes to reflect the limited rights minority holders have over distributions, sale and operations.
- Control premium — The extra amount per share a buyer pays to acquire a controlling stake versus the price of a minority interest. Reflects the value of being able to direct the business.
- Business valuation — The set of methods used to estimate the economic value of a company or its equity, almost always triangulated across several approaches into a defensible range.
- Family-business M&A — Acquisitions of family-owned and -operated companies. Distinctive features include succession planning, owner-dependence concerns, normalisation of personal expenses and earnouts tied to founder transition.