Public company data anchors most valuation methodologies, but private company interests trade very differently — less liquidly, and often without the ability to influence company decisions. Two adjustments capture this: the discount for lack of control (DLOC) and the discount for lack of marketability (DLOM). Getting them right — or wrong — can move a valuation conclusion by 20-40%.
Discount for Lack of Control
A controlling interest can direct company strategy, set compensation, decide on distributions, and initiate a sale. A minority interest can do none of that. When a valuation starts from a controlling-interest benchmark (like a guideline public company multiple, which reflects freely tradable minority shares priced with an implicit expectation of eventual control premiums), a DLOC may need to be applied to value a non-controlling interest — or conversely, a control premium added when valuing a controlling interest benchmarked off minority trading data.
Discount for Lack of Marketability
Even a controlling interest in a private company can’t be sold in an afternoon the way a public stock can. The DLOM captures the value investors ascribe to being able to convert an interest to cash quickly, with the studies most commonly cited (restricted stock studies, pre-IPO studies) suggesting a range that typically runs from roughly 10% to 30%+, depending on the specific facts: dividend policy, size, financial performance, and prospects for a near-term liquidity event.
Where This Gets Contentious
- Litigation and shareholder disputes: The applicable standard of value (fair market value vs. fair value) determines whether DLOM and DLOC apply at all — many jurisdictions disallow these discounts in dissenting shareholder or oppression remedy cases specifically to protect minority shareholders
- Circular logic risk: Applying both a minority discount and a marketability discount without carefully checking they aren’t double-counting the same underlying lack of liquidity is a common technical error
- Quantitative models vs. empirical studies: Option-pricing models (like the Chaffe put option model) offer a more analytically grounded DLOM estimate than simply picking a number from the middle of a restricted stock study range, but require defensible inputs of their own
The Practical Takeaway
DLOC and DLOM aren’t a single lookup-table number — they require matching the discount to the specific facts of the interest being valued and the standard of value that governs the engagement. A valuation report that applies a boilerplate discount without walking through this reasoning is one of the first things opposing counsel or a reviewing auditor will challenge.
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