The Discount for Lack of Marketability

Two investors each hold a claim worth an identical $1,000 in future cash flows. One holds it as shares of a company listed on a major exchange — sellable in seconds, at a visible price, to any of thousands of buyers. The other holds an identical economic claim in a private company — no exchange, few willing buyers, and a sale that could take months of negotiation. Nobody would value these two claims the same, even though the underlying cash flows are identical, because the ability to convert the claim into cash on demand is itself worth something.

Marketability is not the same thing as control

It's easy to conflate DLOM with the minority discount, but they measure different frictions and both can apply to the same interest. A minority discount reflects the inability to direct the company's decisions. A marketability discount reflects the inability to convert the holding into cash quickly at a fair price, regardless of whether the holder has control or not — even a 100% controlling owner of a private company faces a marketability problem, because there's no exchange to sell the whole company on tomorrow morning.

Empirical estimates of DLOM commonly draw on two kinds of evidence: restricted stock studies, comparing the price of a public company's freely tradable shares against otherwise-identical shares of the same company that are contractually restricted from trading for a period, and pre-IPO studies, comparing private transaction prices in the same company shortly before its IPO against the eventual IPO price. Both approaches tend to produce discounts in a wide range, commonly cited as roughly 15–35%, depending heavily on company size, the length of the restriction, and how uncertain the near-term liquidity event is.

Worked example

A private company's controlling-interest, public-equivalent value is estimated at $100 per share using precedent transactions. The interest being valued is a small minority stake, and the company has no near-term plans for an IPO or sale.

1. Apply a minority discount of 20%: 100 \times (1 - 0.20) = \80$.
2. Apply a DLOM of 25%, given the illiquid, no-near-term-exit profile: 80 \times (1 - 0.25) = \60$.
3. Final estimated value per share for this minority, illiquid stake: $60 — a 40% total reduction from the control, public-equivalent starting point, even though the two discounts (20% and 25%) don't simply add.

What this means in practice

DLOM is applied constantly in estate and gift tax valuations, 409A valuations of private company common stock, and litigation over fair value of minority stakes — anywhere a private, illiquid interest needs a defensible dollar value. The size of the discount should be justified by facts specific to the interest: how likely and how near is a liquidity event (an IPO, a sale), are there contractual transfer restrictions, and how large and easily divisible is the stake.