Discounts for Lack of Marketability

August 24, 2024 Valuation

Valuation discounts applied to ownership interests that cannot be readily sold in an active market.

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Discounts for lack of marketability (DLOM) are valuation discounts applied when an ownership interest cannot be sold as readily as a comparable marketable interest. DLOM is common in private-company valuation, restricted stock analysis, estate and gift tax valuation, and minority-interest appraisal.

\text{Nonmarketable Value} = \text{Marketable Value} \times (1 - \text{DLOM})

\text{DLOM} = 1 - \frac{\text{Nonmarketable Value}}{\text{Marketable Value}}

The discount should reflect the specific barrier to sale, not a generic private-company haircut.

DLOM diagram showing marketable value adjusted by restrictions, holding period, buyer access, and transaction risk to reach nonmarketable value.

What DLOM Adjusts

DLOM adjusts a value indication for reduced saleability. It is usually applied after the analyst has estimated a marketable value for the same economic interest.

Issue	Why It Can Support DLOM
Transfer restrictions	The owner may need consent, registration, or a permitted exemption before selling.
Expected holding period	A longer forced holding period increases uncertainty and opportunity cost.
Limited buyer pool	Fewer qualified buyers can reduce competitive tension.
Information gap	Private-company buyers may require more diligence or a higher return.
Transaction cost	Legal, advisory, tax, and diligence costs reduce net proceeds.
Dividend or distribution policy	Cash distributions can reduce the cost of waiting to sell.
Volatility and risk	Higher uncertainty can increase the value of marketability.

DLOM is distinct from a lack-of-control or minority discount. A noncontrolling interest may also lack marketability, but the reasons and evidence should be separated.

Worked Example

Suppose an analyst estimates a marketable minority interest value of $10 million and supports a 20% DLOM.

\text{Nonmarketable Value} = 10.0 \times (1 - 0.20) = 8.0

The nonmarketable value is $8 million. The discount is not the conclusion by itself; the key support is why a buyer would require a 20% price reduction for the specific interest and valuation date.

Evidence Methods

Analysts use several evidence sources to support DLOM. No single method is automatically correct.

Method	What It Uses	Main Limitation
Restricted stock studies	Price differences between restricted shares and freely traded shares	Study periods, company quality, holding-period rules, and sample selection may differ from the subject.
Pre-IPO studies	Private transaction prices before a later IPO	IPO timing and selection bias can be material.
Option or protective-put models	Cost of price protection during a holding period	Sensitive to volatility, holding period, dividends, and assumptions.
Transaction evidence	Actual sales of similar interests	Comparable private transactions may be scarce or stale.
Factor analysis	Transfer limits, distributions, risk, buyer pool, expected exit	Requires disciplined weighting and support.

The strongest DLOM support usually triangulates more than one method and explains why the selected discount fits the actual interest being valued.

Public Source Checks

Use public sources for rule, restriction, and valuation context:

IRS Valuation of Assets: IRS valuation resources, including DLOM-related job-aid material.
SEC Rule 144 overview: Background on restricted and control securities resale conditions.
Investor.gov Rule 144 glossary: Investor-facing explanation of Rule 144.
SEC EDGAR Company Search: Filings for lockups, resale registration rights, restricted securities, and offering documents.

For a private-company interest, also review the shareholder agreement, operating agreement, buy-sell agreement, option plan, capitalization table, prior transactions, and any appraisal or tax valuation report.

Scenario Question

An appraiser applies a 30% DLOM because the company is private, but does not identify transfer restrictions, expected holding period, buyer universe, dividend policy, or supporting studies.

Answer: The conclusion is weak. DLOM should be supported by the specific marketability limits of the interest being valued and the evidence used to translate those limits into a discount.

Quiz

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When DLOM Misleads

DLOM can mislead when:

the discount is selected from a study without matching the subject interest
marketability and minority-control effects are double-counted
the holding period assumption is unsupported
transfer restrictions have expired or are easier to remove than assumed
the company pays distributions that reduce the cost of waiting
a likely near-term sale, IPO, redemption, or buy-sell event is ignored
the analyst uses public-market liquidity evidence without adjusting for the specific interest
tax, legal, or reporting context requires a different valuation premise

The discount should be reproducible: another reviewer should be able to trace the selected DLOM to facts, assumptions, and evidence.

Analyst Takeaway

Treat DLOM as a supported valuation adjustment, not a rule-of-thumb percentage. The selected discount should connect transfer limits, expected holding period, buyer access, information quality, risk, distributions, and transaction costs to the specific interest being valued.

Review Checklist

Before relying on a DLOM, document:

valuation premise, standard of value, valuation date, and interest being valued
whether the base value is controlling, noncontrolling, marketable, or nonmarketable
transfer restrictions, lockups, rights of first refusal, and approval requirements
expected holding period and evidence supporting it
dividends, distributions, redemption rights, or expected liquidity events
restricted stock, pre-IPO, option-model, or transaction evidence used
how the analysis avoids double-counting liquidity, marketability, and control adjustments

Marketability: The saleability attribute that DLOM adjusts for.
Liquidity: Related but distinct ability to convert to cash with limited price impact.
Transaction Cost: Costs that can reduce net sale proceeds.
Preferred Stock: Security rights can affect transferability and economic value.
Cap Table: Ownership schedule used to identify the interest and rights being valued.
Pre-Money Valuation: Private financing valuation context where transfer rights and security terms matter.
Post-Money Valuation: After-round valuation that may still need marketability analysis for private securities.

FAQs

Is DLOM the same as a minority discount?

No. DLOM addresses reduced saleability. A minority discount addresses lack of control. A minority interest can also lack marketability, but the two effects should be analyzed separately.

Can DLOM be zero?

Yes. If the interest is freely transferable, has a strong buyer market, and has no meaningful sale-process restrictions beyond normal transaction costs, a separate DLOM may not be supportable.

Should DLOM always come from restricted stock studies?

No. Restricted stock studies can be useful, but the selected discount should consider the subject interest’s restrictions, expected holding period, distributions, volatility, buyer universe, and transaction evidence.

Revised on Sunday, June 21, 2026

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