Business Valuation - What is the "Discount for Lack of Marketability" or DLOM?
A business valuation is often needed on a nonmarketable ownership interest in closely held companies. Depending on the valuation approaches and methods applied, in addition to the benchmark data used, this analysis may initially arrive at valuation of the ownership interest on a marketable level of value.
The difference in value between a liquid business ownership interest such as a publicly traded company as compared to an otherwise comparable illiquid business ownership interest can be significant. This value difference is referred to as the Discount for Lack of Marketability or DLOM.
Valuation analysts will often consider two types of models to measure the appropriate level of the DLOM - Empirical models and Theorectical models.
Empirical models use analyses that are based on empirical capital market transaction observations. There are two categories of studies often used. First are studies of price discounts on the sales of restricted shares of publicly traded companies referred to as the restricted stock studies. Second are studies of price discounts on private stock sale transactions prior to an initial public offering referred to as pre-IPO studies.
Theorectical models do not rely on capital market pricing evidence, but rather are based on fundamental economic analysis such as discounted cash flow (DCF) models or option pricing models (OPM).
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Disclaimer: The information contained in this article is for general guidance only. The information presented should not be acted upon without the advice and guidance of a professional tax, legal, or financial adviser who is familiar with all the relevant facts.