Understanding the Discount for Lack of Marketability (DLOM) in Private Companies

A discount for lack of marketability, usually abbreviated DLOM, is one of the most discussed—and most misunderstood—adjustments in private-company valuation. In plain English, DLOM reflects the economic disadvantage of owning an interest that cannot readily be converted to cash through an active, efficient market. Public-company shares can often be sold in seconds. A minority membership interest in a private LLC, a nonvoting block of family-company stock, or an interest in a closely held partnership may require months or years to sell, may require consent from other owners, may provide limited information to potential buyers, and may have no clear redemption right. Those frictions can reduce what a hypothetical buyer would pay.

DLOM is not a magic percentage. It is not a punishment for being private, a shortcut for weak earnings, or a number that the IRS or a court automatically approves. A defensible DLOM analysis starts with the valuation assignment: the standard of value, valuation date, subject interest, premise of value, and level of value. Then the appraiser evaluates the liquidity characteristics of that exact ownership interest and supports the selected adjustment with evidence, professional judgment, and transparent documentation. That is why DLOM belongs inside a disciplined business valuation process, not as an afterthought.

This guide explains what DLOM is, where it fits in a professional business appraisal, how it interacts with common valuation methods such as the income approach, discounted cash flow, the market approach, EBITDA multiples, and the asset approach, and what owners and advisers should gather before relying on a DLOM conclusion.

What DLOM Means in One Sentence

DLOM is a valuation adjustment for the reduced value of an ownership interest caused by the owner’s inability to sell that interest quickly, predictably, and at low cost for cash.

Estate and gift tax regulations describe fair market value as the price at which property would change hands between a willing buyer and willing seller, neither under compulsion and both having reasonable knowledge of relevant facts (26 C.F.R. § 20.2031-1; 26 C.F.R. § 25.2512-1). Revenue Ruling 59-60 likewise emphasizes that valuation of closely held interests depends on facts such as earnings, dividends, assets, goodwill, economic outlook, prior transactions, and comparable evidence (Internal Revenue Service [IRS], 1959). DLOM fits that framework because a willing buyer would care not only about expected cash flows but also about the ability to exit the investment.

A buyer considering a nonmarketable private-company interest may ask:

• Can I sell this interest without consent from other owners?
• Is there a redemption right or buy-sell agreement?
• Does the company make distributions?
• Are financial statements reliable and timely?
• How long might I have to hold the interest?
• Is there an active market of likely buyers?
• Would selling the interest trigger legal, tax, or practical constraints?

Those questions are marketability questions. They are different from whether the company is profitable, whether the holder has control, or whether the underlying assets are valuable.

Why DLOM Matters to Owners, Attorneys, CPAs, and Trustees

DLOM can materially affect value in estate planning, gift tax reporting, shareholder disputes, divorce, buy-sell agreements, charitable transfers, family limited partnerships, trust administration, internal ownership transfers, and litigation. In some engagements, the subject company’s enterprise value is relatively straightforward, but the value of a specific ownership interest depends heavily on restrictions, cash yield, and expected exit timing.

For example, assume a family-owned operating company has a normalized equity value of $10 million. A 20% interest has a simple pro-rata value of $2 million before considering control and marketability. If that interest is nonvoting, cannot be transferred without family approval, receives irregular distributions, and has no redemption right, a hypothetical buyer may not pay the same amount as for freely tradable shares representing the same economic claim. The adjustment is not because the company has no value; it is because the buyer faces liquidity risk and transaction friction.

In tax settings, the need for support is especially important. The IRS Internal Revenue Manual describes business valuation as a process that considers the applicable standard of value, valuation date, valuation approaches, and relevant facts (IRS, n.d.). Technical Advice Memorandum 201544003 also illustrates the importance of qualified appraisal support and independence in tax-sensitive valuations, though a TAM is not precedential authority (IRS, 2015). Professional standards such as AICPA Statement on Standards for Valuation Services No. 1, USPAP, and the International Valuation Standards similarly emphasize scope, assumptions, methods, evidence, and reporting quality rather than unsupported rules of thumb (American Institute of Certified Public Accountants [AICPA], 2007; Appraisal Foundation, 2024; International Valuation Standards Council [IVSC], 2025).

Start With the Valuation Assignment Before Discussing Any Discount

A DLOM conclusion is only meaningful after the appraiser defines what is being valued. The same company can produce different value conclusions depending on the subject interest and purpose of the valuation. A 100% controlling interest valued for a sale process is not the same as a 5% nonvoting interest transferred to a trust. A valuation under federal fair market value is not always the same as a state statutory fair value determination, a buy-sell agreement formula, or investment value to a strategic buyer.

Standard of value: fair market value, fair value, investment value, or contract value

The standard of value controls the lens through which marketability is analyzed. For federal estate and gift tax purposes, fair market value generally asks what hypothetical willing parties would agree to at the valuation date (26 C.F.R. § 20.2031-1; 26 C.F.R. § 25.2512-1). A DLOM may be relevant if a hypothetical buyer of the subject interest would demand compensation for illiquidity.

Other contexts can differ. Financial reporting fair value under ASC 820 focuses on market participant assumptions and the unit of account (Financial Accounting Standards Board [FASB], 2024). Some state-law fair value statutes in shareholder oppression or dissenters’ rights matters may limit or prohibit certain minority or marketability discounts. A buy-sell agreement may specify a formula that either permits, excludes, or fails to address discounts. Investment value may reflect a particular buyer’s synergies or exit strategy rather than a hypothetical market participant.

The practical point: do not ask, “What DLOM should we use?” until you know the standard of value and governing authority.

Subject interest: what exactly is being valued?

The subject interest may be common stock, preferred stock, voting shares, nonvoting shares, an LLC membership interest, a limited partnership interest, a profits interest, or another equity class. Its rights matter. Transfer restrictions, voting rights, information rights, distribution preferences, redemption provisions, put/call rights, drag-along rights, tag-along rights, liquidation preferences, and consent requirements can all influence marketability.

A professional business appraisal should identify:

• the percentage interest;
• the class of equity;
• voting and governance rights;
• economic rights and preferences;
• transferability restrictions;
• any buy-sell, redemption, or option provisions;
• the valuation date;
• the applicable premise and standard of value;
• the level of value produced by each valuation method.

Without that foundation, a DLOM conclusion can become arbitrary.

Level of value: controlling, marketable minority, or nonmarketable minority

The “level of value” concept helps explain where DLOM fits. A value indication may represent a controlling interest, a marketable minority interest, a nonmarketable minority interest, or another level depending on the method and inputs used. Valuation treatises emphasize that discounts and premiums must be matched to the level of value already produced by the selected valuation methods (Pratt & Niculita, 2008; Hitchner, 2017).

A guideline public company method often starts from freely traded minority shares and may indicate a marketable minority level of value. A merger-and-acquisition transaction method may reflect control value. A discounted cash flow model may indicate control or minority value depending on whether the forecast and assumptions reflect control over cash flows, distributions, reinvestment, and exit. An asset approach may indicate entity-level net asset value before considering the marketability of a specific ownership interest.

DLOM Compared With Other Valuation Discounts and Adjustments

DLOM is often confused with other discounts or adjustments. Confusion creates double counting: the same economic issue is used to lower value more than once. A credible appraisal separates marketability from control, business risk, tax leakage, asset-level adjustments, and capital-structure items.

Adjustment	Main question answered	Usually addressed where?	DLOM interaction / caution
Discount for lack of marketability	How difficult is it to sell the subject interest for cash?	After the level-of-value conclusion	Should focus on liquidity and transferability, not generic business risk
Discount for lack of control	Does the holder lack power over dividends, management, sale timing, and policy?	Level-of-value adjustment	Separate from DLOM; do not duplicate governance limitations
Key person discount	Is value dependent on one individual?	Cash flows, discount rate, or separate adjustment	Do not reuse the same owner-dependence risk as DLOM
Company-specific risk	Are operating risks above market expectations?	Discount rate or cash flows	DLOM should not duplicate risk already in discounted cash flow
Built-in gains tax	What tax leakage would affect asset conversion or sale?	Entity or asset-level adjustment	Separate from marketability; cases such as Dunn and Jelke are cautionary
Debt/working capital adjustment	What is equity value after obligations and required operating capital?	Before equity interest value	Not a marketability discount
Asset-specific haircut	Are individual assets overvalued, impaired, or costly to liquidate?	Asset approach	Do not relabel asset impairment as DLOM

DLOM versus discount for lack of control

Control is about decision power. Marketability is about liquidity. A minority owner may lack the power to force distributions, replace management, sell assets, or approve a merger. Those are control issues. The same minority owner may also be unable to sell the interest easily. That is a marketability issue. Revenue Ruling 93-12 is often discussed in minority-interest contexts because it addresses family attribution in gift tax valuation, but it does not turn lack of control and lack of marketability into the same adjustment (IRS, 1993).

A controlling interest can also be nonmarketable. A 100% interest in a private business may take months to sell, require due diligence, involve transaction costs, and face financing uncertainty. However, the support for a controlling-interest marketability adjustment differs from support for a small noncontrolling interest. The buyer universe, ability to control sale timing, and ability to control distributions are different.

DLOM versus company-specific risk in discounted cash flow

A discounted cash flow model estimates present value by forecasting future cash flows and discounting them at a rate appropriate for risk. If the forecast already reflects customer concentration, declining margins, management gaps, weak growth, and capital expenditure needs, those issues should not be repeated as DLOM support. Pratt and Grabowski (2014) and Damodaran (2012) both emphasize the importance of matching risk adjustments to the right part of a valuation model. DLOM should address residual illiquidity—the friction of converting the ownership interest to cash—not every risk associated with the business.

DLOM versus asset approach adjustments and built-in gains tax

In an asset approach, the appraiser may adjust assets and liabilities to fair value, consider debt, working capital, liquidation costs, or built-in gains tax. Cases such as Estate of Dunn and Estate of Jelke are useful reminders that tax leakage and asset-level issues are conceptually separate from marketability (Estate of Dunn v. Commissioner, 2002; Estate of Jelke III v. Commissioner, 2007). A minority interest in a real estate LLC can be nonmarketable, but the discount should not simply duplicate taxes, selling costs, debt, or property-level valuation adjustments already reflected in net asset value.

The Marketability Factors Appraisers Analyze

The best-known DLOM case, Mandelbaum v. Commissioner, organized a practical set of factors that courts and appraisers often discuss: financial statement analysis, dividend policy, company nature, history and outlook, management, control, transfer restrictions, holding period, redemption policy, and costs associated with public offering or sale (Mandelbaum v. Commissioner, 1995). The factors are not a mechanical checklist that produces a number. They are a framework for disciplined analysis.

Expected holding period

The longer a buyer expects to wait before liquidity, the greater the marketability concern generally becomes. A buyer who expects a sale closing in 60 days faces different risk than a buyer who may have to hold an illiquid interest for ten years. Holding period is influenced by company plans, industry transaction activity, shareholder agreements, redemption provisions, litigation, financing conditions, and management intentions.

A signed letter of intent, binding purchase agreement, funded redemption, or near-term recapitalization can reduce holding-period risk, but only after analyzing contingencies, financing, consents, termination rights, and closing conditions. Conversely, no sale process, restrictive governance, and no redemption path can lengthen the expected holding period.

Transfer restrictions and governing documents

Private-company equity is often subject to shareholder agreements, operating agreements, partnership agreements, rights of first refusal, rights of first offer, consent requirements, family transfer restrictions, securities-law limitations, or buy-sell provisions. These terms affect who can buy the interest, when it can be sold, how price is determined, and whether the seller can force liquidity.

The appraiser should review the actual documents rather than relying on management’s summary. A restriction that looks severe may be less important if there is a mandatory redemption at fair market value. A buy-sell agreement that looks helpful may be less valuable if it is unfunded, discretionary, based on a stale formula, payable over many years, or subject to dispute.

Dividend or distribution policy

Regular distributions can mitigate lack of marketability because investors receive interim cash returns while waiting for an exit. No distributions, unpredictable distributions, or distributions controlled entirely by other owners can increase the discount a buyer requires. Dividend history was one of the factors emphasized in Revenue Ruling 59-60 and Mandelbaum (IRS, 1959; Mandelbaum v. Commissioner, 1995).

Distribution analysis should be realistic. A company that historically distributed excess cash may stop distributions because of debt covenants, capital expenditures, litigation, or succession issues. A pass-through entity may distribute only enough cash to cover tax liabilities, which may not provide an attractive investment yield.

Company financial strength and information quality

Financial statement quality affects marketability because buyers need reliable information to price risk. Audited or reviewed statements, timely tax returns, clear forecasts, clean accounting, and transparent related-party transactions can reduce uncertainty. Poor books, commingled personal expenses, missing schedules, aggressive add-backs, unresolved tax issues, or limited information rights can narrow the buyer universe and increase sale friction.

This does not mean weak accounting automatically becomes DLOM. Some financial-statement issues belong in normalized EBITDA, forecast adjustments, working capital, or the discount rate. The marketability question is whether information limitations make the interest harder to sell or require a buyer to demand additional compensation for uncertainty during a transaction process.

Size, growth, volatility, leverage, and profitability

Larger, profitable, diversified, lower-leverage companies with credible growth plans are often easier to market than small, volatile, highly leveraged, or distressed companies. However, the business risk itself should first be addressed in the valuation methods. A small company’s lower EBITDA multiple, higher cost of capital, or weaker cash-flow forecast may already reflect much of the risk. DLOM should capture the remaining liquidity disadvantage of the specific interest.

Buyer universe and exit path

Marketability improves when there is a plausible buyer universe and exit path. Strategic acquirers, private equity roll-up activity, recurring industry transactions, strong management teams, and transferable customer relationships may improve liquidity prospects. Marketability worsens when the interest is a small minority block, the company is family-controlled, documents restrict transfers, there is unresolved litigation, the industry is declining, or information rights are weak.

Redemption rights, put/call rights, and buy-sell provisions

An enforceable, funded redemption right can materially affect DLOM because it gives the holder a path to liquidity. A put right at fair market value payable promptly in cash is different from a discretionary board redemption payable over ten years at below-market interest. Life insurance funding in a buy-sell agreement may help in death-triggered transfers but may not help for lifetime sales or disputes.

DLOM evidence checklist for owners and advisers

Before requesting a DLOM analysis, gather the documents and facts an appraiser will need:

• Current shareholder agreement, operating agreement, partnership agreement, and amendments.
• Buy-sell agreement, redemption provisions, put/call rights, rights of first refusal, and consent provisions.
• Capitalization table, equity classes, voting rights, and preference terms.
• Five years of financial statements and tax returns where available.
• Interim financial statements as of the valuation date.
• Distribution history, dividend policy, tax distribution policy, and board minutes discussing distributions.
• Forecasts, budgets, backlog, debt schedules, covenant compliance, and capital expenditure plans.
• Prior offers, prior stock transfers, letters of intent, sale discussions, or recapitalization proposals.
• Customer concentration, supplier concentration, management depth, and key person information.
• Industry transaction activity and likely buyer universe.
• Pending litigation, tax audits, estate administration documents, divorce pleadings, or shareholder dispute materials.
• Any restrictions arising from securities law, lender agreements, franchise agreements, or regulatory approvals.

Evidence and Methods Used to Estimate DLOM

Appraisers rarely rely on one DLOM method alone. A well-supported conclusion usually triangulates empirical evidence, analytical models, and qualitative factors. Professional standards do not prescribe a single formula; they require methods and assumptions appropriate to the engagement and adequately disclosed (AICPA, 2007; Appraisal Foundation, 2024; IVSC, 2025).

Restricted stock studies

Restricted stock studies compare restricted shares of public companies with otherwise similar freely traded shares. The intuitive appeal is strong: the same issuer has two securities with different resale restrictions. Revenue Ruling 77-287 recognized restricted stock transactions as potentially relevant evidence in considering marketability restrictions (IRS, 1977). Peer-reviewed and professional literature has examined these discounts and their determinants, including issuer characteristics, private placement effects, information asymmetry, and illiquidity (Bajaj et al., 2001; Hertzel & Smith, 1993; Silber, 1991).

The limitations are equally important. Restricted stock issuers are public companies, not private operating companies. Transactions may include negotiation effects, block size effects, investor monitoring, issuer distress, information differences, and securities-law restrictions. Rule 144 holding periods and market conditions have changed over time, so older studies may not match current facts. A study average should never be copied into a private-company business appraisal without analysis.

Pre-IPO studies

Pre-IPO studies compare private transactions before an initial public offering with later IPO prices. They attempt to measure the value difference between private illiquidity and public-market liquidity. This evidence can be informative because it involves movement toward public marketability.

But pre-IPO studies are also difficult to apply. The company may grow rapidly between the private transaction and IPO. Market conditions may change. IPO pricing may include underpricing, new information, capital-structure changes, and selection bias. The private transaction may involve employees, insiders, or preferred securities. Therefore, pre-IPO evidence is best used as context, not as a plug-in formula.

Option-pricing and theoretical models

Option-pricing models treat marketability as related to the value of price protection during an expected holding period. Chaffe’s protective-put framework, Longstaff’s upper-bound model, and Finnerty’s average-strike put model are commonly discussed examples (Chaffe, 1993; Finnerty, 2012; Longstaff, 1995). Inputs may include expected holding period, volatility, distributions, risk-free rate, and the type of price protection assumed.

These models add analytical discipline, especially by forcing the appraiser to think about time and volatility. They also create risk if used mechanically. Longstaff’s model is an upper-bound analysis and can overstate practical DLOM when treated as an observed market price. Volatility inputs for private companies are difficult. Holding period assumptions can drive the result. Distributions can reduce illiquidity costs. Option models should be reconciled with facts and market evidence.

Qualitative factor analysis and professional judgment

Qualitative factor analysis connects the selected DLOM to the subject interest. It considers transfer restrictions, cash distributions, expected holding period, financial statement quality, growth, leverage, volatility, buyer universe, exit prospects, redemption rights, and other marketability facts. Professional judgment is not a weakness when it is documented and tied to evidence. It becomes a weakness when the report says “we selected 30% because it is common” or cites studies without explaining comparability.

DLOM evidence family	What it measures	Best use	Key limitations
Restricted stock studies	Discounts for restricted versus freely traded public shares	Market evidence benchmark	Public-company proxy, transaction effects, Rule 144 changes, issuer-specific effects
Pre-IPO studies	Difference between private transactions and later IPO pricing	Liquidity-event benchmark	IPO selection bias, timing, underpricing, growth, changed capital structure
Option-pricing models	Cost or value of price protection during a holding period	Analytical cross-check	Input-sensitive, theoretical, may overstate if assumptions are unrealistic
Qualitative factor analysis	Company- and interest-specific marketability facts	Reconciliation and support	Subjective if unsupported
Hybrid triangulation	Combines evidence, models, and facts	Most defensible professional approach	Requires careful documentation and judgment

How DLOM Interacts With Valuation Methods

DLOM should be applied only after understanding what the primary valuation methods already measure. This is one of the most important safeguards against double counting.

Income approach and discounted cash flow

Under the income approach, the appraiser estimates value based on expected economic benefits. In a discounted cash flow model, future cash flows are projected and discounted to present value using a risk-adjusted discount rate. The model may be built on enterprise cash flows, equity cash flows, control-level assumptions, minority assumptions, or expected distributions. Each choice affects whether a separate DLOM is appropriate.

If a DCF model assumes the company will be sold in year five at a market-derived exit multiple, it may already include a liquidity event. If a DCF model values only expected minority distributions with no terminal sale proceeds, the indicated value may already reflect some illiquidity. If the discount rate includes a company-specific risk premium for weak management, customer concentration, and volatility, those risks should not be used again as DLOM support. DLOM should focus on the marketability of the ownership interest after the DCF value is reconciled.

Market approach and EBITDA multiples

The market approach estimates value by reference to transactions or publicly traded companies. Guideline public company multiples often reflect marketable minority interests because public shares trade in active markets. M&A transaction multiples may reflect controlling interests and deal-specific synergies. Private transaction databases may include smaller, less liquid companies but still require careful interpretation.

EBITDA multiples should be normalized before DLOM is considered. A company’s EBITDA may require adjustments for owner compensation, nonrecurring expenses, related-party rent, discretionary expenses, and unusual revenue. Those adjustments affect the base value. DLOM is not applied casually to EBITDA itself; it is applied, if appropriate, to a value indication at a defined level of value.

For instance, an appraiser might select an EBITDA multiple after considering size, margins, growth, customer concentration, and industry risk. If those characteristics already reduced the selected multiple, the appraiser should not cite the same issues again as a reason for a larger DLOM unless they separately affect marketability.

Asset approach

The asset approach can be important for holding companies, investment entities, real estate LLCs, equipment-intensive businesses, or liquidation-premise valuations. The approach estimates the value of assets minus liabilities, often after adjustments to fair value. However, the liquidity of the underlying assets is not the same as the liquidity of a particular ownership interest.

A real estate LLC may own property that could theoretically be sold. A minority LLC member may not control whether the property is sold, may face transfer restrictions, may receive limited distributions, and may have no redemption right. DLOM may still be relevant, but only after separating property value, debt, taxes, liquidation costs, and entity-level adjustments.

Area	Double-counting risk	Better practice
Discounted cash flow	Customer concentration lowers forecast and is reused as DLOM support	Use DLOM only for residual liquidity and exit risk
Discount rate	Company-specific risk premium includes the same risks later described as marketability	Document which risks are in the rate versus DLOM
EBITDA normalization	Poor accounting is ignored in EBITDA and then “fixed” through DLOM	Normalize EBITDA first, then analyze marketability
Market approach	Private-company size and risk affect selected multiples and again inflate DLOM	Identify data source and level of value
Asset approach	Built-in gains tax or liquidation costs counted as DLOM too	Separate asset/entity adjustments from interest marketability
Lack of control	Distribution limitations support both minority discount and DLOM without allocation	Allocate governance/control versus liquidity effects
Tax leakage	Tax costs are included in net asset value and then cited again as marketability	Reconcile tax adjustments before DLOM

A Simple DLOM Calculation—and Why the Percentage Is the Hard Part

The arithmetic of DLOM is simple. The support for the selected percentage is the hard part. Consider this purely hypothetical example. It is not a recommended discount, not a typical range, and not an IRS-approved number.

Entity equity value after valuation methods:           $5,000,000
Subject interest percentage:                                  20%
Pro-rata indicated value before DLOM:                  $1,000,000
Hypothetical selected DLOM for illustration only:              25%
DLOM dollar adjustment:                                  $250,000
Indicated value after DLOM:                              $750,000

The formula is:

Value after DLOM = Pro-rata value × (1 - selected DLOM)

The selected DLOM must come from analysis. In the example, a 25% assumption would require evidence about holding period, transfer restrictions, distributions, information quality, buyer universe, empirical studies, analytical models, and comparable facts. A different subject interest in the same company could have a different DLOM. A different valuation date could produce a different DLOM.

Hypothetical DLOM	Pro-rata value	Dollar discount	Indicated value after DLOM
10%	$1,000,000	$100,000	$900,000
20%	$1,000,000	$200,000	$800,000
25%	$1,000,000	$250,000	$750,000
35%	$1,000,000	$350,000	$650,000

This sensitivity table shows why DLOM matters. It does not show what DLOM should be. Any final conclusion must be supported by the facts of the subject interest and the valuation date.

Scenario 1: Family-Owned Operating Company With No Redemption Right

Assume a profitable family manufacturing company has $3 million of normalized EBITDA, stable margins, moderate growth, and no plan to sell. A 20% nonvoting interest is being valued for a gift to a trust. The operating agreement restricts transfers to outsiders, requires family consent, provides no put right, and allows distributions only at the board’s discretion. Financial statements are reviewed but not audited. The company has historically distributed cash irregularly.

A DLOM is likely relevant because the subject interest is difficult to sell and offers no clear liquidity path. However, the appraisal should still separate issues. The company’s size, margins, growth, and customer risk may be captured in the income approach and market approach. Lack of voting rights may affect control. DLOM should focus on the buyer’s expected holding period, limited exit market, restrictions, distribution uncertainty, and information access.

A strong report would review the governing documents, explain the level of value produced by the valuation methods, analyze Mandelbaum-type factors, consider empirical and model evidence, and reconcile a selected DLOM without claiming a generic percentage.

Scenario 2: Private Company Under a Signed Sale Agreement

Assume a private company has signed a purchase agreement with a strategic buyer. The transaction is expected to close in 90 days, subject to financing, regulatory approval, and working capital true-up. A minority interest is being valued as of a date after signing but before closing.

The expected holding period may be much shorter than for a company with no sale process. That can reduce marketability concerns. But DLOM may not disappear automatically. The appraiser must analyze deal certainty, termination rights, required approvals, financing risk, whether the subject interest participates in sale proceeds, whether dissent rights exist, and what a hypothetical buyer would know at the valuation date. A pending transaction is a valuation fact, not a guarantee.

Scenario 3: Real Estate or Investment Holding LLC

Assume an LLC owns appreciated real estate and marketable securities. The underlying securities are liquid and the real estate has an independent appraisal. A 15% noncontrolling LLC interest is being valued for estate tax purposes. The operating agreement restricts transfers, gives the manager broad discretion over sales and distributions, and provides no redemption right.

The asset approach may be the primary valuation method because the LLC’s value is tied to assets. But the minority LLC interest may still be nonmarketable. The appraiser should first value the assets and liabilities, consider built-in gains tax or liquidation costs where appropriate, and then separately analyze the marketability of the LLC interest. The DLOM should not duplicate property-level selling costs or taxes already included in net asset value.

Scenario 4: Buy-Sell Agreement With Redemption Rights

Assume a professional services firm has a buy-sell agreement requiring the company to redeem departing owners at an appraised fair market value, payable 40% at closing and the balance over three years with interest. Transfers to outsiders are prohibited. The company has life insurance for death-triggered redemptions but not for voluntary retirement.

The agreement improves marketability because it creates a defined liquidity mechanism. It may not eliminate DLOM because payment is partly deferred, funding may be uncertain, and the redemption formula may be disputed. The appraiser must read the agreement, evaluate enforceability and funding, and consider whether a hypothetical buyer would view the redemption right as reliable.

What a Defensible Business Appraisal Should Show

A professional DLOM analysis should be transparent enough that a reader can understand the logic even if they disagree with the final percentage. The report should generally include:

1. The valuation date, standard of value, premise of value, and intended use.
2. A clear description of the subject interest and legal rights.
3. The valuation approaches and methods used before DLOM.
4. The level of value produced by each method and the reconciled base value.
5. The marketability factors considered.
6. Empirical evidence, model evidence, professional literature, and case guidance used as context.
7. The rationale for the selected DLOM.
8. A discussion of double counting and limitations.
9. A complete reference list and workpaper support.
10. Clear disclosure of assumptions, restrictions, and reliance materials.

This level of documentation aligns with the professional emphasis in AICPA SSVS No. 1, USPAP, IVS, and IRS valuation guidance: define the assignment, select appropriate methods, support assumptions, and report conclusions clearly (AICPA, 2007; Appraisal Foundation, 2024; IRS, n.d.; IVSC, 2025).

Red flags in weak DLOM support

Be cautious when a report says:

• “We used 30% because that is common.”
• “The company is private, so we applied a standard DLOM.”
• “The IRS accepts this discount.”
• “The discount comes from Mandelbaum,” without explaining comparable facts.
• “We applied DLOM to EBITDA.”
• “The company has customer concentration,” when that risk already reduced cash flows or multiples.
• “The interest is minority and therefore illiquid,” without separate lack-of-control and marketability analysis.
• “The buy-sell agreement was not reviewed.”
• “No transfer restrictions were considered.”
• “The valuation standard does not matter.”

When DLOM Is Likely Relevant, Limited, or Not Supportable

DLOM is most likely relevant when the subject interest is in a private company, there is no active market, transfers are restricted, distributions are limited, financial information is difficult to obtain, the buyer universe is narrow, and no near-term liquidity event is expected.

DLOM may be limited when the company has a signed sale agreement, enforceable redemption rights, strong and regular distributions, broad buyer interest, high-quality information, or a governing agreement that creates reliable liquidity.

DLOM may be inappropriate or legally uncertain when the governing statute, court standard, or contract excludes discounts; when the value indication already reflects nonmarketability; when the subject asset is freely tradable; or when the appraiser cannot support a separate marketability adjustment.

Common Mistakes to Avoid

Mistake 1: using a generic DLOM percentage

No universal DLOM percentage applies to all private companies. Empirical studies, court cases, and professional literature provide evidence and context, but they do not replace subject-company analysis. Courts have scrutinized discounts when experts fail to connect them to facts (Mandelbaum v. Commissioner, 1995; Estate of Davis v. Commissioner, 1998; Estate of Jameson v. Commissioner, 1999).

Mistake 2: applying DLOM before knowing the level of value

If a method already produces a nonmarketable minority value, adding another DLOM may be double counting. If a method produces marketable minority value, DLOM may be appropriate. If a method produces control value, the appraiser may need to consider both control and marketability implications. The order matters.

Mistake 3: treating DLOM as a fix for weak earnings or low EBITDA

Weak earnings should be addressed through normalized EBITDA, forecast cash flows, selected multiples, margins, working capital, and discount rates. DLOM is not a catch-all for poor performance. A business with weak earnings may or may not have a high DLOM; a strong business can still have a meaningful DLOM if the subject interest is highly illiquid.

Mistake 4: ignoring buy-sell agreements and transfer restrictions

Governing documents can increase or reduce DLOM. They can prohibit transfers, create consent requirements, establish redemption rights, define formulas, or create mandatory purchase obligations. Appraisers and advisers should read the documents, not assume their effect.

Mistake 5: confusing marketability with tax leakage or asset impairment

Built-in gains tax, liquidation costs, debt, working capital needs, and impaired assets may affect value. They are not the same as lack of marketability. Separating these adjustments improves credibility and reduces audit or litigation risk.

Practical Advice for Business Owners

Owners can improve the quality of a future DLOM analysis by keeping clean records. Maintain accurate financial statements, tax returns, capitalization records, minutes, distribution histories, and current governing documents. If a buy-sell agreement exists, review whether the formula is current, funded, and enforceable. If family transfers are planned, do not wait until the last minute to gather documents.

Owners should also understand that marketability is not always negative planning. Clear transfer provisions, redemption rights, regular distributions, and reliable reporting can reduce uncertainty and improve perceived liquidity. In a sale or financing context, those same practices can make the company easier to diligence and more attractive to buyers.

Practical Advice for Attorneys and Estate Planners

Attorneys should define the subject interest and standard of value clearly. Drafting matters. A buy-sell agreement that says “fair market value” but is silent about discounts can create disputes. A formula that is never updated can produce unintended results. Transfer restrictions designed for control may also affect valuation. Estate planners should preserve documents supporting the valuation date, restrictions, business purpose, and economic reality of the arrangement.

For tax reporting, coordinate early with the appraiser. Provide governing documents, gift or estate facts, prior transfers, entity history, and any relevant agreements. Avoid pressuring the appraiser toward a target discount; independence and support are more valuable than a fragile conclusion.

Practical Advice for CPAs and Tax Advisers

CPAs can help by reconciling valuation-date financials to tax returns, identifying normalization adjustments, documenting owner compensation, preparing debt and working capital schedules, and explaining distributions. Because DLOM interacts with EBITDA, discounted cash flow assumptions, and market approach multiples, clean financial analysis reduces the risk that operating issues get incorrectly pushed into the marketability discount.

Tax advisers should also watch for qualified appraisal and qualified appraiser requirements in relevant tax contexts. While this article is not legal or tax advice, tax-sensitive valuations deserve careful documentation and professional coordination.

Practical Advice for Trustees, Executors, and Fiduciaries

Fiduciaries should retain qualified independent appraisers, preserve documents, and document reliance. If a valuation is later reviewed by beneficiaries, the IRS, a court, or another party, the fiduciary will want a clear record showing that DLOM was not selected casually. Provide the appraiser with trust or estate documents, ownership records, restrictions, financial statements, and correspondence about possible sales or redemptions.

How Simply Business Valuation Approaches DLOM Assignments

A practical DLOM engagement should feel organized from the first document request. The appraiser is not merely looking for a discount study; the appraiser is building a market participant narrative. That narrative should answer why a buyer would or would not demand compensation for illiquidity, how long the buyer might expect to hold the interest, what cash returns may be available during the holding period, and what legal or practical barriers stand between the owner and a cash exit. For a business owner, this can be reassuring because the analysis is not supposed to be mysterious. The strongest support often comes from the company’s own documents and history.

The first step is assignment definition. The appraiser confirms the valuation date, purpose, standard of value, intended users, ownership interest, entity structure, and governing documents. A DLOM analysis for a gift tax transfer may need different language and support than a DLOM analysis in a divorce, shareholder dispute, estate administration, charitable contribution, or internal buyout. The conclusion may also differ if the subject interest is voting versus nonvoting, common versus preferred, controlling versus noncontrolling, or subject to an enforceable redemption right.

The second step is base valuation. Before DLOM is discussed, the company or interest must be valued using appropriate valuation methods. That may include an income approach such as discounted cash flow, a market approach using normalized EBITDA or revenue multiples, an asset approach for asset-heavy or holding-company situations, or a reconciliation of several approaches. This order matters. If the base valuation is weak, the DLOM conclusion will also be weak. A discount cannot rescue an unsupported enterprise value.

The third step is level-of-value reconciliation. The appraiser asks what the base value represents. Does the income approach reflect control over reinvestment, salaries, distributions, and sale timing? Do market approach guideline public company multiples reflect liquid minority shares? Do transaction multiples reflect control? Does the asset approach reflect entity-level net assets rather than a saleable minority interest? The answer determines whether DLOM is appropriate and what value base should be adjusted.

The fourth step is marketability evidence. The appraiser reviews transfer restrictions, buy-sell provisions, distribution history, financial statement quality, expected holding period, potential buyer universe, industry sale activity, pending offers, redemption rights, financing constraints, and litigation or tax issues. Empirical studies and option-pricing models may inform the analysis, but they do not replace these facts. The objective is to select a DLOM that fits the subject interest, not to reverse-engineer a preferred value.

The fifth step is reporting. A useful report should explain the evidence in business language. It should tell the reader which facts increased marketability risk, which facts reduced it, which risks were already captured in cash flows or multiples, and why the final conclusion is reasonable. If a report cannot explain the DLOM without relying on “typical” percentages, it probably needs more analysis.

Quick Owner Preparation Guide

Owners and advisers can reduce cost, delay, and uncertainty by preparing the appraisal file before the valuation date or as soon as a transfer or dispute is expected. The most useful preparation is not cosmetic. It is evidence-based. Keep final signed governing documents in one place. Reconcile capitalization records. Preserve minutes and written consents. Track distributions by date and owner. Retain prior purchase offers, redemption discussions, and internal transfer records. Maintain forecasts and budgets in the ordinary course of business rather than creating them only for litigation or tax reporting.

Good preparation also includes explaining context. If the company stopped distributions to fund expansion, document that. If a sale process was explored and abandoned, keep the materials. If a buy-sell formula has not been updated for years, tell the appraiser rather than hiding the issue. If financial statements are reviewed but not audited, provide the accountant’s reports. If related-party rent or owner compensation affects EBITDA, provide support for normalization. These details help the appraiser distinguish operating risk from marketability risk.

Finally, remember that DLOM is not automatically good or bad. A lower DLOM may be appropriate when an interest has reliable liquidity rights, strong distributions, and excellent information. A higher DLOM may be appropriate when restrictions and uncertainty are severe. The goal is not to maximize or minimize the discount in isolation. The goal is a credible, defensible value conclusion that can be understood by owners, advisers, tax authorities, courts, lenders, or transaction counterparties.

Frequently Asked Questions About DLOM

1. What is DLOM in plain English?

DLOM is a discount that may apply when an ownership interest is hard to sell. It reflects the fact that a buyer may pay less for an illiquid private-company interest than for an otherwise similar interest that can be sold quickly in an active market.

2. Is DLOM the same as a minority discount?

No. A minority discount addresses lack of control. DLOM addresses lack of marketability. A minority owner may suffer both disadvantages, but each must be analyzed separately to avoid double counting.

3. Does DLOM apply only to minority interests?

No. A controlling interest in a private company can also be nonmarketable because selling a private business may take time and involve transaction costs. However, the analysis differs because a controlling owner has more ability to influence sale timing, distributions, and information.

4. How is DLOM calculated?

The arithmetic is usually simple: apply the selected discount to the appropriate base value. The difficult part is selecting and supporting the discount. Appraisers consider empirical studies, option-pricing models, case guidance, professional literature, and the facts of the subject interest.

5. What documents support a DLOM analysis?

Key documents include operating agreements, shareholder agreements, buy-sell agreements, transfer restrictions, financial statements, tax returns, distribution history, prior transactions, capitalization records, forecasts, debt agreements, and evidence of likely exit opportunities.

6. Does the IRS allow DLOM?

DLOM is recognized in valuation practice and has been considered in many tax cases, but no percentage is automatically allowed. The IRS can challenge unsupported discounts. Estate and gift tax valuations should connect DLOM to fair market value, the subject interest, and valuation-date facts.

7. Can I use an average DLOM from a restricted stock or pre-IPO study?

Not by itself. Study averages can provide context, but they may not match the company, interest, restrictions, holding period, market conditions, or valuation date. A defensible report explains why evidence is relevant and how it was adjusted or weighted.

8. How do dividends or distributions affect DLOM?

Regular distributions can reduce marketability concerns because buyers receive cash while waiting for an exit. No distributions or unpredictable distributions can increase marketability risk. The appraiser should consider both history and expected future policy.

9. How does a buy-sell agreement affect DLOM?

A strong, enforceable, funded buy-sell or redemption right can reduce DLOM by creating a liquidity path. A stale, discretionary, unfunded, or disputed agreement may provide little relief. The actual agreement must be reviewed.

10. Can DLOM be used with a discounted cash flow valuation?

Yes, but carefully. A discounted cash flow valuation may produce a value at a particular level. The appraiser must determine whether that value already reflects illiquidity. Risks already captured in cash flows or the discount rate should not be counted again as DLOM.

11. How does DLOM interact with EBITDA multiples and the market approach?

Market approach multiples may reflect marketable minority value, control value, or private transaction evidence depending on the data. EBITDA should be normalized first. DLOM, if appropriate, is applied to a value indication after the level of value is identified—not casually to the EBITDA multiple.

12. Does DLOM apply under the asset approach?

It can. The asset approach may value the underlying assets and liabilities, but a minority interest in the entity that owns those assets may still be hard to sell. The appraiser must separate asset-level adjustments, taxes, debt, and liquidation costs from ownership-interest marketability.

13. What causes double counting in DLOM analysis?

Double counting occurs when the same issue reduces value twice. Examples include using customer concentration in the discount rate and again as DLOM, counting built-in gains tax in net asset value and again as DLOM, or using distribution limitations for both lack of control and DLOM without explaining the split.

14. Can a company with strong profits still have a DLOM?

Yes. Profitability and marketability are related but not identical. A profitable company may still have an ownership interest that is hard to sell because of restrictions, no redemption right, limited buyer universe, or uncertain exit timing.

15. When should a business owner obtain a professional business appraisal?

Owners should consider a professional appraisal before major transfers, estate or gift tax reporting, buy-sell events, shareholder disputes, divorce proceedings, financing, charitable contributions, succession planning, or transaction negotiations. DLOM is too fact-specific to rely on a simple online rule of thumb.

Key Takeaways

DLOM is one of the most important adjustments in private-company valuation because liquidity matters. But the adjustment is only credible when it is tied to the subject interest, valuation date, standard of value, level of value, and real marketability factors. A strong analysis explains the valuation methods used first, identifies whether the value indication is marketable or nonmarketable, evaluates restrictions and expected holding period, considers empirical and analytical evidence, avoids double counting, and documents the selected conclusion.

For owners and advisers, the practical lesson is simple: do not treat DLOM as a generic percentage. Treat it as a disciplined part of a professional business valuation. Gather the documents, understand the governing agreements, clarify the valuation purpose, and work with a qualified appraiser who can explain how marketability affects the value of the specific private-company interest.

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