Discounts for lack of marketability (DLOM) refer to the method used to help calculate the value of closely held and restricted shares. The theory behind DLOM is that a valuation discount exists between a stock that is publicly traded and thus has a market, and the market for privately held stock, which often has little if any marketplace.
Various methods have been used to quantify the discount that can be applied including the restricted stock method, IPO method, and the option pricing method.
## Core Description - Discounts For Lack Of Marketability (DLOM) reduce an indicated value when an ownership interest cannot be sold quickly, predictably, and at low cost. - The size of a DLOM depends on real-world frictions: resale restrictions, thin buyer pools, uncertain exit timing, and information gaps. - Good practice is to separate marketability from control rights, use evidence-based methods, and avoid double counting risk already reflected elsewhere. * * * ## Definition and Background ### What DLOM means in plain English Discounts For Lack Of Marketability (DLOM) describe the value haircut investors apply when an asset is hard to sell. “Hard to sell” usually means there is no active public market, there are contractual transfer limits, the sale process is long, or pricing is uncertain. A helpful mental model: two shares can represent the same business, but the share that can be sold tomorrow in a liquid market is typically worth more than the share that might take months to sell, if it can be sold at all. DLOM is the adjustment that bridges that gap. ### Where DLOM shows up most often DLOM is commonly used for: - Private company equity and partnership or LLC interests - Restricted shares (including public company shares subject to lockups or resale limits) - Valuations for transactions, financial reporting, tax planning, and disputes The key is not the label “private” or “public,” but whether the specific interest is marketable in practice. ### Marketability vs. liquidity (and why people mix them up) A “liquidity discount” can be used broadly to describe the friction of turning an asset into cash. DLOM is typically narrower and more ownership interest-specific: it focuses on the marketability of a particular stake, given its legal restrictions and the realistic depth of buyers. Because both concepts relate to “selling difficulty,” they are often treated as synonyms. In valuation work, that can create double counting unless you define exactly what your discount is capturing. * * * ## Calculation Methods and Applications ### The core logic: start from a marketable reference value Most DLOM work starts by estimating a marketable value, what the interest might be worth if it were freely tradable, then applies a discount to reflect restrictions and time to exit. A common mechanical expression is: \\\[\\text{Non-marketable value}=\\text{Marketable value}\\times(1-\\text{DLOM})\\\] This formula is widely used because it is transparent, not because it solves the hard part. The hard part is supporting the DLOM percentage with evidence that matches the subject interest. ### Key drivers that typically move DLOM up or down DLOM is heavily influenced by: - Expected holding period (months vs. years) - Probability and timing of a liquidity event (sale, IPO, redemption) - Transfer restrictions (approval rights, ROFR or ROFO, lockups) - Buyer universe (many buyers vs. a handful of qualified purchasers) - Volatility, uncertainty, and information transparency - Distributions or dividends (cash returned while you wait can reduce the impact of illiquidity) - Market conditions (risk appetite, interest rates, availability of capital) ### Method 1: Restricted Stock Method (empirical comparison) The restricted stock method estimates Discounts For Lack Of Marketability by looking at observed price differences between freely tradable shares and restricted shares that cannot be resold for a period. The intuition is straightforward: the market reveals what investors demand as compensation for not being able to sell. How it is applied in practice: - Identify study data that resemble the subject (industry, size, volatility, restriction length) - Use the observed discount as a starting range - Adjust for differences in the subject’s restrictions, fundamentals, and liquidity path This method is popular because it is anchored in transactions. Its weakness is “comparability risk”: the study sample may not truly match the company being valued. ### Method 2: IPO Method (pre-IPO vs. post-IPO) The IPO method compares a company’s pre-IPO transaction prices with the IPO price (or early post-IPO trading), attributing some of the uplift to improved marketability after listing. This can be useful when: - The pre-IPO transaction is close in time to the IPO - The capital structure is comparable (or can be normalized) - You can separate marketability effects from growth or news effects The challenge: IPO uplift often reflects more than liquidity. Public investors may re-rate growth, margins, or narrative. Without careful adjustment, the method can overstate DLOM. ### Method 3: Option Pricing (treat illiquidity like losing an “exit option”) Option-based approaches model the economic cost of being unable to sell for a certain time. In plain terms: if you cannot sell, you have lost flexibility. The value of that lost flexibility increases with volatility and restriction length. In professional work, this approach is used when inputs can be supported (restriction term, volatility proxy, distribution assumptions). It can be helpful for restricted shares of public companies where volatility data are observable. It can be misleading when the inputs are assumed and the output is treated as precise. ### Common applications investors actually encounter - **Private investment rounds and secondaries:** a negotiated price often embeds Discounts For Lack Of Marketability because the buyer expects to hold for years and face transfer approvals. - **Employee equity with lockups:** even if the company is listed, a lockup can make the interest temporarily non-marketable, which can justify a DLOM-style adjustment in certain valuations. - **Financial reporting and fairness opinions:** analysts may triangulate restricted stock evidence, IPO evidence, and a model-based check rather than rely on a single method. * * * ## Comparison, Advantages, and Common Misconceptions ### DLOM vs. control premium vs. minority discount (DLOC) These concepts address different issues: Adjustment What it measures Typical trigger Discounts For Lack Of Marketability (DLOM) Difficulty, cost, and time to sell No active market, restrictions, thin buyers Control premium Ability to direct decisions Strategy, dividends, M&A, management control Minority discount (DLOC) Lack of control rights Limited voting, no influence on distributions or liquidity events Liquidity discount (broad term) Friction converting to cash Often used across asset classes A minority stake can be highly marketable (a widely traded stock). A controlling stake can be highly illiquid (a private company). That is why DLOM and control-related adjustments should not be blended casually. ### Advantages of using DLOM thoughtfully - **More realistic exit-aware pricing:** it forces you to acknowledge time to cash, not just “paper value.” - **Better comparability:** it helps reconcile private marks with public comparables when liquidity differs. - **Clearer negotiation:** in secondaries, DLOM frames the cost of waiting and restrictions in a structured way. ### Common misconceptions (and how to avoid them) #### “DLOM is always 20%–30%” A rule-of-thumb DLOM is easy, but often hard to support. Discounts For Lack Of Marketability can vary widely depending on restrictions, volatility, buyer depth, and credible exit timing. A short expected holding period with a strong liquidity program may justify a lower discount than a long, uncertain path to exit. #### “DLOM is the same as risk” Illiquidity is a form of risk, but DLOM should primarily capture selling constraints and delayed cash realization. If your base valuation already uses a higher discount rate or conservative cash flows to reflect business risk, layering a large DLOM without checking overlap can over-discount. #### “If it’s private, DLOM must be large” Some private shares trade frequently in organized secondary channels or have structured redemption programs. Marketability is about actual transferability and buyer access, not the company label. #### “Option models are more scientific, so they’re always better” Option models can create false confidence. When volatility or holding period is assumed, the result is not necessarily more accurate, only more complex. * * * ## Practical Guide ### A step-by-step workflow you can reuse #### Step 1: Define the interest you are valuing Clarify what exactly is being priced: - Common vs. preferred - Voting rights, information rights - Transfer limits (board approval, ROFR or ROFO) - Any forced sale or buyback terms DLOM is interest-specific. Two holders in the same company can face different restrictions and therefore different Discounts For Lack Of Marketability. #### Step 2: Build a “marketable reference” value Start from a marketable anchor: - A public peer multiple (carefully adjusted) - A recent arm’s-length transaction (normalized) - An internal valuation that explicitly assumes marketability If the anchor already embeds illiquidity (for example, secondary trade indications in a thin market), applying DLOM again may double count. #### Step 3: Triangulate DLOM using more than one lens A practical approach is to combine: - Restricted stock study ranges (empirical anchor) - IPO method intuition (if an IPO path is credible and near-term) - An option-model reasonableness check (if inputs are defensible) You are not trying to find the one true number. You are trying to justify a range and select a point that matches the facts. #### Step 4: Sanity-check with a proceeds timeline Ask: “What does the investor actually receive, and when?” - If distributions are likely during the holding period, the impact of illiquidity may be lower. - If the only path is a speculative exit in 5 to 7 years, a higher DLOM can be easier to support. #### Step 5: Document what would change the discount State the catalysts that would reduce Discounts For Lack Of Marketability: - An executed sale mandate - A signed registration rights agreement - A company-funded tender offer program - A shortened lockup or simplified transfer approvals This makes the DLOM actionable rather than a static haircut. ### Case Study (hypothetical, not investment advice) A U.S. software company has common shares held by employees. The company is private, profitable, and expects a potential sale in 3 to 5 years, but there is no guarantee. Transfers require board approval, and buyers must be accredited investors. There are limited financial disclosures to non-shareholders. Assume an analyst estimates a marketable reference value of $10.00 per share using a peer multiple approach. The analyst then considers Discounts For Lack Of Marketability with three evidence points: - Restricted stock study evidence suggests a broad range (for similar restriction periods) of roughly 15% to 35%. - The company’s exit timing is uncertain and could be several years, pushing the discount upward within that range. - There is no dividend or distribution policy, so holders receive no cash while waiting, also pushing upward. The analyst selects a 25% DLOM as a midpoint consistent with a multi-year holding period and tight transfer approvals, producing: - Marketable value: $10.00 - Indicated DLOM: 25% - Non-marketable value: $7.50 What could justify a lower DLOM later? A structured tender offer that reliably creates annual liquidity, improved disclosures to expand the buyer pool, or binding terms that shorten time to exit. * * * ## Resources for Learning and Improvement ### Standards and professional guidance - International Valuation Standards (IVS) and related practice guidance on valuation approaches and documentation - USPAP principles for credible appraisals and supportable assumptions These references will not provide a DLOM percentage, but they shape what “defensible” looks like: clear scope, consistent bases of value, and transparent reasoning. ### Empirical evidence sources - Restricted stock transaction research and datasets - Pre-IPO transaction vs. IPO pricing research - Private secondary market research summaries Use these to build ranges and context, then adjust for the company’s actual restrictions, volatility, and exit path. ### Deeper technical learning - Corporate finance and valuation textbooks covering illiquidity, option intuition, and discounting logic - Peer-reviewed research on liquidity, information asymmetry, and market microstructure ### Skill-building checklist (what to practice) - Writing a 1 page DLOM memo that ties the discount to specific restrictions - Building a sensitivity table (e.g., holding period 2, 4, 6 years; DLOM 15%, 25%, 35%) - Reconciling why your chosen DLOM is not double counting the discount rate or cash flow haircuts * * * ## FAQs ### Does DLOM apply to publicly traded stocks? Usually not for freely tradable shares because investors can sell into an active market. However, if shares are restricted (lockup, legal resale limits, or contractual transfer constraints), a DLOM-style adjustment may be relevant for valuing that specific restricted interest. ### Can DLOM and a minority discount (DLOC) both apply? Yes, if they address different economic limitations: DLOC reflects weaker control rights, while Discounts For Lack Of Marketability reflect selling constraints. The key is applying them from a consistent base and ensuring you are not counting the same risk twice. ### Why do DLOM estimates vary so much between analysts? Because inputs differ: expected holding period, probability of a liquidity event, comparability of empirical studies, and how restrictions are interpreted. Small changes in exit timing and buyer depth can materially change the discount. ### Is a higher DLOM always “more conservative”? Not necessarily. Overstating DLOM can be as misleading as understating it, especially if the base valuation already incorporates illiquidity or higher risk via discount rates, scenario weights, or conservative cash flows. ### What is the single most important DLOM driver to clarify first? Time to liquidity. Even with the same legal restrictions, a credible near-term liquidity program can reduce Discounts For Lack Of Marketability compared with an open-ended holding period. * * * ## Conclusion Discounts For Lack Of Marketability (DLOM) are best understood as the cost of being unable to exit quickly and predictably. They are most useful when anchored to a clear marketable reference value, tied to the specific restrictions of the interest, and supported by multiple evidence lenses rather than a single rule of thumb. By separating marketability from control rights and documenting what drives liquidity (or blocks it), investors and analysts can use DLOM to translate “paper value” into a more realistic, exit-aware valuation. > 支持的語言: [English](https://longbridge.com/en/learn/discounts-for-lack-of-marketability--102650.md) | [简体中文](https://longbridge.com/zh-CN/learn/discounts-for-lack-of-marketability--102650.md)