Understanding DLOC & DLOM in Private Company Valuation

No aspect of private company valuation is more frequently contested - or more consequential - than the application of minority interest and marketability discounts. These adjustments are not accounting conventions or arbitrary haircuts; they are grounded in well-documented empirical evidence and decades of court precedent. Together, the discount for lack of control (DLOC) and the discount for lack of marketability (DLOM) account for the fact that a minority ownership interest in a private business is fundamentally less valuable - and less liquid - than an equivalent percentage of a publicly traded company. Understanding how these discounts work, and how they are supported, is essential for any business owner, estate planner, or advisor involved in a private company transaction or transfer.

The starting point for any discount analysis is the level of value - a concept that organizes the valuation universe into a hierarchy. At the top is the control, marketable level: what a buyer would pay for 100% of the enterprise in a liquid market. This is the level at which most M&A transactions occur and where guideline company public market data lives. Below that is the minority, marketable level: a proportionate share of enterprise value, adjusted for the fact that a minority holder cannot control business decisions, but still liquid enough to sell in a public market. At the bottom is the minority, non-marketable level: the interest is neither controlling nor readily saleable. Most private company minority interests are valued at this lowest level of the hierarchy.

The Discount for Lack of Control (DLOC)

A minority interest holder in a private company cannot unilaterally force a dividend, compel a sale of the company, hire or fire management, direct investment strategy, or determine the company's capital structure. These control rights belong to the majority owner. Without them, the minority holder is a passive participant whose economic returns depend entirely on the decisions of others. Rational market participants demand a lower price for this powerless position, and the DLOC measures how much lower.

Appraisers typically derive DLOC from control premium studies - datasets that track the premium paid in acquisitions of public companies relative to their pre-announcement trading prices. These premiums, which historically average 20–40% in public company acquisitions, represent what buyers pay for control. The DLOC is the inverse: if control is worth a 30% premium over the non-controlling price, then the non-controlling price implies a DLOC of approximately 23% (1 – 1/1.30). Widely used sources include the Mergerstat/BVR Control Premium Study and the Duff & Phelps databases. DLOCs in practice typically range from 15% to 35%, depending on the governance structure, the terms of the operating agreement, and any specific minority protections.

The Discount for Lack of Marketability (DLOM)

Even after adjusting for the lack of control, a minority interest in a private company has another important characteristic that reduces its value: it cannot be easily sold. Unlike a publicly traded stock that can be liquidated in seconds at a known price, a private company interest may take months or years to sell - if a buyer can be found at all. The DLOM compensates the holder of such an interest for this illiquidity by reducing the value below the minority, marketable equivalent.

The empirical basis for DLOM is extensive. Two primary bodies of evidence are used: restricted stock studies and pre-IPO studies. Restricted stock studies compare the prices paid for unregistered (restricted) shares of public companies - shares that cannot be freely traded for a specified lock-up period - to the contemporaneous price of the freely tradeable shares. The discounts observed in these studies represent the market's compensation for illiquidity alone, since control is not a variable. Pre-IPO studies compare the prices of private company transactions in the months before the company went public to the IPO price - capturing the private company illiquidity discount. Both bodies of evidence consistently show discounts in the range of 20–45%, depending on the company's characteristics and the time period.

Modern appraisers also apply option-pricing models - most notably the Longstaff model, the Finnerty model, and the QMDM (Quantitative Marketability Discount Model) - to develop DLOM estimates grounded in the specific characteristics of the subject interest. These models incorporate variables like holding period, expected volatility of the underlying enterprise value, dividend yield, and the likelihood of a liquidity event, producing a theoretically defensible DLOM rather than relying solely on historical averages from broad empirical studies.

When DLOC and DLOM are applied in combination - as is typical for a minority interest in a closely held business - their cumulative effect can be substantial. A 25% DLOC applied to a controlling-interest value of $10 million produces a minority, marketable equivalent of $7.5 million. Applying a 30% DLOM to that figure yields a minority, non-marketable value of approximately $5.25 million - roughly half of the controlling-interest enterprise value. These are not errors or over-discounting; they reflect the genuine economic reality of owning a minority stake in a private business. ValuEdge's appraisers document every discount with specific empirical support, ensuring that the concluded value at any level of the hierarchy can withstand rigorous scrutiny.