The Discount for Lack of Marketability (DLOM) reflects the reduction in value applied to privately held businesses due to the greater difficulty, time, and uncertainty involved in converting them into cash compared to publicly traded securities.
What is Discount for Lack of Marketability?
DLOM — Discount for Lack of Marketability — refers to the reduced value typically associated with privately held businesses compared to publicly traded securities, which can be sold with little more than the push of a button. It is one of three commonly used valuation discounts.
Selling a private business, by contrast, often involves high transaction costs, longer timelines, and considerable uncertainty.
In fact, industry consensus suggests that the majority of small businesses brought to market ultimately fail to sell — a reality not fully captured by theoretical models or statistical averages.
How To Apply the DLOM Correctly
While the concept of DLOM is widely recognized, its proper application, just like with DLOC and Key Person Discount, demands case-specific judgment.
Compilations of studies, many originating from data sets and market conditions as far back as the Vietnam War era, are poor substitutes for real-world experience and practical analysis. Reliance on such compilations without adjustment for the facts at hand runs contrary to both Revenue Ruling 59-60 and current market realities.
In evaluating marketability for this business, the analysis should be grounded in transaction dynamics, liquidity characteristics, and the actual ease (or difficulty) of sale, not in rote application of historical discount tables.
Is A Discount for Lack of Marketability Always Needed?
There is no technical requirement to apply a DLOM in every valuation, but marketability must be directly addressed. In a market where even government guarantees such as SBA 7(a) loans cannot ensure a successful sale, marketability remains a central, case-specific issue.
Whether a marketable capitalization rate is selected at the outset or a non-marketable rate is adjusted via an explicit DLOM, either method can be consistent with sound valuation practice — provided the process is grounded in real-world judgment rather than mechanical formulas. Our valuations align with both the spirit and the letter of Revenue Ruling 59-60.
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