When valuing a private or closely held company, whether for estate planning, ownership transfers, gifts, or sale, the difference between owning a full control block and a minority interest can be substantial. Key among the adjustments applied is a discount for lack of marketability and often a lack of control discount, which recognizes that shares in a private business are harder to sell and may carry limitations. This guide explains what these discounts are, when they apply even to controlling interests and how business owners should think about them today.
A discount for lack of marketability (DLOM) reflects the fact that privately held company shares, unlike publicly traded stock, cannot be quickly or easily sold on a public market. That illiquidity reduces their fair market value.
The goal of DLOM is to approximate the price a willing buyer, willing seller would accept for a non-marketable interest accounting for the time, risk, and cost required to find a buyer, effect a transfer, or wait for liquidity.
Empirical studies and valuation practice often show typical DLOM ranges between 30% and 50%, though actual discounts vary widely depending on the company, industry, size, restrictions, and market conditions.
The most traditional application of DLOM is when valuing non-controlling, restricted interests in private companies for gift and estate transfers, gifting shares to family members, or selling a minority stake.
Because such interests are harder to resell and offer no decision-making control, buyers demand a discount reflecting both illiquidity and lack of influence.
It is more controversial, but some valuation experts argue that even controlling interests in a private business may warrant a marketability discount in certain circumstances. For example, even if you own 100% of the company, the fact remains that the shares are illiquid, and finding a third-party buyer may take time and involve costs.
The size of the discount typically decreases as the level of control increases. In other words, a full controlling block may justify a smaller DLOM than a minority interest, but many valuation practitioners believe some discount still makes sense if the company is privately held, and the shares are not readily marketable.
Whether a particular appraisal accepts a DLOM on a controlling interest often depends on facts and circumstances: business size, profitability, buyer universe, transfer restrictions, and ability to find suitable buyers.
Discounts for lack of marketability and lack of control come into play in several common business or estate-planning scenarios:
Gifts or transfers of ownership interests transferring minority or restricted shares may qualify for DLOM, reducing gift or estate tax valuations.
With estate and gift tax planning by discounting non-marketable interests, owners can potentially transfer wealth while reducing potential gift or estate tax liability.
Valuation for sale or buy-out situations when a shareholder sells or redeems shares in a private business. Applying DLOM helps determine a fair price reflecting market constraints and liquidity risks.
Asset valuations for legal disputes or buy-out negotiations in divorce, shareholder disputes, or buy-outs; DLOM helps ensure valuations reflect real-world resale limitations rather than just book value or pro-rata share of corporate worth.
Discount size is subjective and fact specific. There’s no fixed one-size-fits-all percentage. Each valuation must consider firm-specific factors: industry, cash flow, asset liquidity, buyer pool, transfer restrictions.
DLOM is separate from lack of control discounts. DLOM addresses transferability and liquidity; lack of control discounts addresses influence and corporate decision rights.
Aggressive discounts may invite scrutiny because discounts reduce taxable value; regulators including the IRS may challenge overly aggressive or unjustified discounts.
Documentation and justification are critical. Proper valuation reports, restriction-analysis, marketability studies, and expert opinions strengthen the defensibility of any applied discounts.
Discounts can materially reduce value but vary widely. As noted, typical DLOM ranges often fall between 30%–50%, but depending on circumstances actual discounts could be less, especially for controlling interests with strong operations.
If you hold non-controlling or restricted shares in a private business, applying a properly supported DLOM can significantly reduce the value of those shares, which can help in gifting, estate planning, or transfer situations.
If you own a controlling interest, don’t assume you automatically escape the valuation of discounts. While DLOM may be smaller for full control blocks, many experts believe a reasonable discount is justified especially if the company lacks ready marketability.
Since discount application depends heavily on facts and valuation-methodology, it’s usually wise to engage a qualified business-valuation professional when preparing valuations for gifts, sales, estate planning, or transfers.
Maintain thorough documentation restriction agreements, capitalization, corporate structure, financials, discussions of liquidity to support any discount applied.
The International Glossary of Business Valuation Terms defines marketability as:
The ability to quickly convert property to cash at minimal cost.
It also defines the discount for lack of marketability (DLOM) as:
An amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.
This glossary provide definitions of the most common business valuation terminology. It is a collaborative effort of the leading business appraisal organizations, including:
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