How DLOM Works
DLOM is generally expressed as a percentage reduction from an otherwise marketable value. If a valuation establishes the value of an ownership interest before applying the discount, the DLOM reduces that value to reflect the characteristics of the specific interest being valued.
The basic calculation can be expressed as:
Value After DLOM = Marketable Value × (1 − DLOM)
For example, assume a private-company interest has an indicated marketable value of $2,000,000 and the valuation analysis supports a 20% DLOM. The adjusted value is $2,000,000 × (1 − 0.20), resulting in $1,600,000. The $400,000 difference represents the valuation adjustment associated with the lack of marketability.
Factors That Influence DLOM
DLOM is not normally selected from a universal percentage because marketability depends on the characteristics of the specific investment. Valuation professionals consider quantitative evidence and qualitative factors that influence how readily an ownership interest could be sold.
- Expected holding period: A longer anticipated period before an investor can realize value may support a larger discount.
- Transfer restrictions: Contractual or regulatory restrictions can affect the ability to sell or transfer the interest.
- Company characteristics: Size, profitability, growth prospects, industry, and financial condition can influence marketability.
- Distribution policy: Expected dividends or distributions can affect the economic benefit of holding a private interest.
- Potential exit opportunities: A credible path to an acquisition, recapitalization, public offering, or other liquidity event can influence the analysis.
The appropriate discount should reflect the specific facts and circumstances rather than simply applying a standard percentage to every private-company valuation.
Methods Used to Estimate DLOM
Several valuation approaches can be used to estimate DLOM. One common approach examines transactions involving restricted securities and compares their prices with otherwise similar freely tradable securities. The observed price difference provides evidence about the economic effect of restricted marketability.
Another approach uses option-based models. These methods can estimate the economic value of the ability to sell an asset over time by considering factors such as expected volatility, time to liquidity, and other relevant assumptions. A longer expected restriction period or greater uncertainty can affect the estimated discount.
A third approach uses empirical transaction data from private-company interests and other market evidence. The selected method should be consistent with the valuation purpose, available information, characteristics of the subject interest, and applicable professional standards.
DLOM in Private-Company Valuation
DLOM is particularly relevant when valuing minority interests in privately held companies because there may be no readily available public market for those shares. The valuation process should distinguish marketability from other valuation adjustments, such as a discount for lack of control, so that each adjustment reflects a separate economic characteristic.
The distinction is important because a holder can have control over a company while still holding an interest that is difficult to sell. Conversely, an interest can be highly marketable while providing limited control. The valuation analysis should therefore consider each attribute independently and avoid double counting related factors.
DLOM and Finance Operations
Although DLOM is primarily a valuation concept, finance teams may encounter related considerations when managing the broader financial lifecycle of private businesses. Accurate cash records and transaction evidence remain important when supporting valuation assumptions and financial reporting. For example, payments associated with operating obligations should be accurately recorded so that liquidity and financial performance remain visible.
Within treasury and finance processes, Payment Approvals help establish authorization for outgoing transactions, while Reconciliation Of Bank Statements supports accurate matching between recorded cash activity and bank transactions. Fraud Prevention controls can further protect the integrity of financial records used in valuation analysis.
Payment execution can also involve Payment Processing By ACH, while a Payment Approval establishes authorization for a specific payment. An Accounts Payable Payment represents settlement of an approved payable, and the selected Vendor Payment Method determines how that obligation is ultimately transmitted to the supplier.
DLOM and Financial Decision-Making
Marketability considerations can influence transactions involving private ownership interests, including shareholder purchases, estate planning, tax reporting, financing arrangements, and strategic investments. Finance professionals should distinguish the value of the underlying business from the value of a specific ownership interest and then evaluate whether marketability characteristics warrant an adjustment.
Liquidity considerations also appear in ordinary operating finance. When companies evaluate supplier payment timing, they may compare cash outflows and available liquidity, including an early payment discount. Related analysis such as Boost Cash Flow by Negotiating Early Payment Discounts can help management evaluate working capital and treasury decisions, although these payment considerations are separate from the valuation mechanics of DLOM.
Similarly, timely invoice approval can affect whether a company captures available supplier discounts and maintains accurate cash forecasting. These operational decisions should not be confused with DLOM, but both demonstrate why liquidity and timing can materially affect financial analysis.
Best Practices for DLOM Analysis
A defensible DLOM analysis should clearly document the valuation date, subject interest, valuation premise, selected methodology, market evidence, assumptions, and reasons supporting the resulting discount. The analysis should also consider whether the selected evidence genuinely reflects the characteristics of the subject interest.
- Define the interest precisely: Identify ownership percentage, rights, restrictions, and relevant shareholder characteristics.
- Use relevant market evidence: Select transactions and studies that reasonably correspond to the subject investment.
- Document assumptions: Explain holding periods, volatility, liquidity expectations, and other material inputs.
- Avoid double counting: Separate DLOM from other valuation adjustments with distinct economic purposes.
- Align with the valuation purpose: Apply methodology appropriate to the transaction, reporting requirement, or tax objective.
A carefully supported DLOM helps translate the characteristics of an illiquid ownership interest into a valuation conclusion that is more consistent with its actual economic attributes.
Summary
Discount for Lack of Marketability adjusts the value of an ownership interest to reflect reduced liquidity and the absence of an active market. It is commonly estimated using restricted-stock evidence, option-based approaches, transaction data, and other valuation techniques. Proper analysis considers transfer restrictions, expected holding periods, company characteristics, liquidity events, and the specific purpose of the valuation. When applied consistently and supported by relevant evidence, DLOM provides an important component of private-company and closely held interest valuation.