Valuation discounts: DLOM and DLOC

A 30 percent interest in a company worth $1 million is not worth $300,000. The holder cannot sell it readily and cannot control what the company does, and both defects have a price. The discounts for lack of marketability and lack of control are how valuation quantifies them — and they are the most litigated numbers in the field.

Two discounts, two defects

The discount for lack of control, DLOC, reflects what a minority holder cannot do: set compensation, declare distributions, sell assets, or force a sale of the company. The discount for lack of marketability, DLOM, reflects that even a controlling stake in a private company cannot be converted to cash in days the way public stock can — a sale takes months, costs real fees, and may not close.

They are distinct and they apply in sequence, not as a sum. A minority interest in a private company takes DLOC first, then DLOM on the reduced amount. A 100 percent interest takes no DLOC at all, and any marketability discount on a controlling stake is smaller and more contested, since much of the illiquidity is already priced into private company multiples.

What the evidence supports

DLOM has two main bodies of support. Restricted stock studies compare prices of a public company's freely traded shares against identical shares restricted from resale; across several decades of studies the observed discounts average in the 15 to 35 percent range, shrinking in later periods as restriction terms shortened. Pre-IPO studies compare private transactions in a company's stock to its subsequent offering price and tend to show larger discounts, though they are criticized because the pre-IPO buyers took real risk that the offering would never happen.

DLOC is usually supported from control premium data — what acquirers pay above market price to take over public companies — inverted into an implied minority discount. Premiums have historically run in the 20 to 40 percent range, implying minority discounts in the teens to high twenties. The inversion is itself contested, because takeover premiums contain synergies as well as control. In practice, concluded DLOMs commonly land between 15 and 35 percent and DLOCs between 10 and 25, with the specific facts deciding where.

How discounts get attacked

Opposing experts and the IRS rarely dispute that discounts exist. They attack the application. The recurring lines of attack are worth knowing in advance, because each one is avoidable:

• Citing averages instead of facts. "The studies average 30 percent, so we took 30" treats the study as a menu. The discount should be built from this interest's facts — distribution history, transfer restrictions, the pool of possible buyers, expected holding period — with the studies as the frame.
• Double counting. If the discount rate already carries heavy company-specific risk for the same illiquidity, or the multiple came from private sales that were themselves illiquid, stacking a full DLOM on top counts the defect twice.
• Wrong standard of value. Under the fair value standard in many states, minority discounts are barred entirely. A discount applied under the wrong standard is not negotiable; it is struck. Seestandards of value.
• Discounting a controlling interest like a minority one.Courts have accepted modest marketability discounts on control positions, but a 35 percent DLOM on a 100 percent interest invites a challenge that usually succeeds.

Where discounts fit in the sequence

Discounts come last. Value the whole enterprise first with the income, market, and asset methods, reconcile to a conclusion, and only then adjust for the character of the specific interest being valued. ExitSight applies DLOM and DLOC as explicit worksheet steps after the method reconciliation, so the report shows the enterprise value, each discount, its basis, and the interest-level conclusion as separate lines a reviewer can trace.

Related reading:fair market value vs. investment value ·building a discount rate ·the excess earnings method