What Is a Discount for Lack of Marketability?
A discount for lack of marketability reduces the appraised value of an ownership interest because it cannot be converted to cash promptly at a predictable price. A share of a public company can be sold within seconds at a visible quote, while a stake in a private business may take months to sell and require lawyers, negotiations, and significant price concessions. Investors pay less for an asset they cannot easily exit, and the DLOM quantifies that haircut.
The discount is distinct from a minority discount, which compensates for lack of control rather than lack of liquidity. In practice, appraisers often apply both when valuing a small stake in a private company: first adjusting for the holder's inability to direct the business, then further for the difficulty of selling the position at all.
How DLOM Is Estimated
The most cited evidence comes from restricted stock studies, which compare the price of a public company's freely traded shares against otherwise identical shares that are contractually locked up under securities rules. Those studies have historically shown discounts averaging around 25% to 35%, although discounts narrowed after the SEC shortened holding periods. Pre-IPO studies take a similar approach, comparing private placement prices to the same company's IPO price months later.
Quantitative models offer another route. Option-based approaches, such as valuing a protective put that would guarantee the holder today's price during the illiquidity period, translate volatility and expected holding time into an implied discount. Riskier businesses, longer expected holding periods, and stakes without contractual exit rights all push the DLOM higher, while an anticipated sale or IPO pushes it lower.
Where DLOM Shows Up in Practice
DLOM is central to estate and gift tax valuations, where taxpayers transferring stakes in family businesses apply the discount to reduce reported value, and the IRS frequently challenges the size of the number. It also arises in shareholder disputes, divorce proceedings, and employee stock valuations under 409A, where independent appraisers must defend a specific discount with data rather than intuition.
For students headed into finance, the concept sharpens a broader intuition: liquidity itself has a price. The same logic explains why private equity investors demand higher returns than public market investors and why late-stage startup shares often trade in secondary markets below headline valuations. An asset's value depends partly on how easily its owner can walk away.
