From Paper Value to Real Worth: Exploring Marketability Discounts
Accurately valuing a business is crucial in various scenarios, including mergers, acquisitions, and legal disputes. One critical component of this process is the discount for lack of marketability (DLOM). This concept addresses the inherent challenges of selling a privately held business and helps ensure valuations reflect real-world conditions.
What Is the Discount for Lack of Marketability?
The discount for lack of marketability, or DLOM, refers to a reduction in a business’s value due to its limited liquidity. Unlike shares of publicly traded companies that can be sold within days on stock exchanges, privately held companies are not easily sold, which impacts their perceived worth.
This discount acknowledges the risks and time involved in converting privately held shares into cash. It is particularly relevant when valuing minority interests in family-owned or closely held businesses.
How Is DLOM Calculated?
Determining the discount for lack of marketability involves subjective analysis informed by industry studies and resources, such as:
Restricted Stock Studies: Examining the difference in value between freely traded shares and restricted shares of the same company.
Pre-IPO Studies: Analyzing stock valuations before a company goes public.
Comparable Market Data: Considering the specifics of the business and its industry.
Typically, DLOM ranges between 5% and 40%, reflecting the degree of difficulty and time involved in selling the business interest.
Why DLOM Is Essential in Business Valuation
In valuation scenarios, accurately reflecting marketability is crucial to achieving fair outcomes. Whether the valuation is for resolving shareholder disputes, estate planning, or mediation cases, DLOM ensures that the assessed value mirrors market realities.
For instance, a business may appear highly valuable on paper, but if selling its shares would take months or years, the actual realizable value decreases. Accounting for this through DLOM ensures a balanced and practical approach to valuation.
DLOM in Mediation and Negotiations
In mediation, where parties aim to resolve disputes amicably, understanding the role of DLOM can streamline negotiations. By acknowledging the illiquidity of privately held shares, parties can avoid overestimating the value of business interests, leading to fairer agreements.
Engaging qualified valuation professionals during mediation ensures that DLOM is appropriately calculated and presented, fostering informed decision-making.
The discount for lack of marketability is a vital consideration in the valuation of privately held businesses. By understanding its application, stakeholders can achieve realistic and equitable outcomes, whether in mediation, litigation, or business planning. For expert assistance in valuation and mediation services, visit Valuation Mediation.
