{“content”:"# Unlocking the Mysteries of Discounts for Lack of Marketability (DLOM)
What Are Discounts for Lack of Marketability (DLOM)?
dDiscounts for Lack of Marketability (DLOM) are applied to evaluate the worth of closely held and restricted shares of a company. The principle behind DLOM is that privately held stocks, lacking a public trading market, are less liquid, leading to a valuation discount when compared to publicly traded stocks.
Various approaches are utilized to ascertain this discount, including the restricted stock method, the IPO method, and the option pricing method.
Unveiling the Concept of DLOM
Restricted Stock Method:
The restricted stock method assumes that the primary difference between a company’s common stock and its restricted stock is marketability. Consequently, the price discrepancy between the two types of shares is attributed to the restricted stock’s lack of marketability.
IPO Method:
This method observes the price variation between shares sold before an Initial Public Offering (IPO) and those sold after. The percentage difference in prices is considered the DLOM.
Option Pricing Method:
In this approach, DLOM is determined by comparing the option’s price to its strike price. The option’s price as a percentage of the strike price represents the DLOM.
Studies commonly indicate that DLOM typically falls between 30% to 50%.
Challenges in Applying DLOM
Noncontrolling, nonmarketable ownership interests in closely held companies present unique challenges for valuation analysts, particularly during taxation disputes such as gift tax, estate tax, generation-skipping transfer tax, income tax, and property tax.
To assist valuators, the Internal Revenue Service (IRS) provides guidance that considers two closely related issues: Discount for Lack of Liquidity (DLOL) and Discount for Lack of Control (DLOC).
The complexities of selling an interest in a privately held company make it a costlier, more uncertain, and time-consuming process compared to liquidating a position in a publicly traded entity. Investments with readily achievable liquidity are more valuable than those tied to private holdings with longer, uncertain timeframes for potential liquidity. This inherent difference often necessitates a valuation discount for privately held companies, reflecting additional costs, uncertainties, and protracted selling timeframes.
Related Terms: valuation, restricted stock, IPO, common stock, gift tax, estate tax, generation-skipping transfer tax, income tax, property tax