The DLOM Conundrum: Measuring Marketability Discounts for Controlling Interests

The value of a minority interest in a privately held business can be impaired by marketability limitations, necessitating a discount for lack of marketability (DLOM). This concept is widely accepted by the courts, the IRS, the valuation community, and the marketplace. There is no consensus, however, on the application of a DLOM in the valuation of controlling interests. This article discusses the factors that may affect the marketability of a controlling interest and offers a logical approach to measuring the discount. Distinction Between Marketability and Liquidity The DLOM generally reflects two distinct characteristics: The right (or lack thereof) to offer an investment for sale in a readily available, discernible market (referred to as marketable or nonmarketable), and The speed with which the investment can be converted to cash (referred to as liquid or illiquid). By way of example, if you own 100 shares of McDonald’s stock, the shares can be sold at your … [Read more...]

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