An Explanation of the Lack of Marketability Discount

Looking for a way to avoid a significant reduction in the value of your stock based on its ability to be marketed adequately?

Marketability Discount – “The concept of marketability deals with the liquidity of the interest—how quickly and certainly it can be converted to cash at the owner’s discretion. ”Source: Chapter 6, Fundamentals, Techniques & Theory, National Association of Certified Valuation Analysts (NACVA)    

We will define Marketability as the ability to convert the property to cash quickly, with minimum transaction and administrative costs in so doing and with a high degree of certainty of realizing the expected amount of net proceeds. ”Source: Valuing Small Businesses & Professional Practices, Pratt, Shannon P., McGraw-Hill, New York, 1998

According to materials presented by NACVA, discounts for a lack of marketability (as determined by court cases) have ranged from 10% to 52%. A great deal of research has taken place over the years to understand this discount and to determine acceptable or normal ranges for various types of companies. This report has taken advantage of more recent studies completed.

The discount for lack of marketability (DLOM) can mean a significant reduction in the value of your stock based on its ability to be marketed adequately. This is one of three discounts that need to be taken into consideration for overall stock, equity, and business valuations. There are several key points that a certified valuation expert will consider when trying to estimate the discount for lack of marketability.

·      Are there potential buyers in the industry?

·      Has the company been approached by any potential buyers?

·      Is there a current opportunity to liquidate the equity stock or units?

·      Has the company produced sufficient earnings to be a potential target of acquisition?

·      What is the consistency and size of the revenues?

·      What is the revenue growth and the stability of that growth?

A  certified valuation service can use the information above to help give you an accurate value of your stock, units, and business and the amount of the discount for lack of marketability.

In general, the faster and easier a potential equity element can be liquidated, the lower the marketability discount. A certified valuator will take into consideration the above elements to determine the lack of marketability discount is appropriate for your business.