Discount for lack of marketability
Valuation & CompsA reduction applied when valuing a stake that cannot be sold quickly, because illiquidity itself has a cost.
Also written: DLOM, illiquidity discount
A share in a listed company can be sold this afternoon at a known price. A stake in a private company cannot: finding a buyer takes months, involves diligence, and the eventual price is uncertain. That difference is worth money, and the discount for lack of marketability is how a valuation reflects it.
It is applied on top of the ordinary enterprise to equity bridge, because it is not about the business at all. The company is identical; what differs is the position of the holder trying to exit.
It compounds with a minority discount when the stake also carries no control. A small holding in a private company is worth less per share than the same business would be if listed, both because it cannot be sold easily and because the holder cannot direct anything.
The size is a matter of judgement rather than formula, commonly in the tens of percent, and it should be argued from the specific facts: transfer restrictions in the shareholders agreement, the realistic buyer universe, and whether any exit path such as a drag along or an IPO is genuinely available.
Worked example
A private company is worth 1,000 on a comparable listed basis. A 15% stake would be 150 pro rata.
Apply a 20% minority discount for having no control, then a 25% discount for illiquidity, and the stake is worth 150 times 0.80 times 0.75, or 90.
The business is identical. The 60 difference is entirely about the position of the holder trying to exit, which is why the discounts are argued from the shareholders agreement and the realistic buyer universe rather than from a table.
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