The DLOM (Discount for Lack of Marketability) is a significant valuation discount applied as a valuation adjustment to the price of an asset. It plays a particularly important role in non-listed companies to reflect their reduced liquidity compared to publicly traded assets. How to determine the DLOM methodically correct, what role it plays in business valuation, and how it differs from DLOC - you will read about all of this in this article.
Determining the DLOM is one of the more challenging tasks in business valuation since the lack of marketability of a company share cannot be directly measured.
Various approaches have become established in practice, which can be fundamentally divided into quantitative and qualitative methods. While quantitative methods are based on mathematical models and empirical studies, qualitative approaches consider the specific characteristics of the company being valued and its shares.
In valuation practice, three key quantitative methods have become established for determining the DLOM:
The Option Pricing Method uses the Chaffe model (Black-Scholes-Merton Put Option), the Finnerty model 2018 (Average-Strike Put Option), and the Asian Protective Put model. These factors together contribute to estimating the illiquidity discount for non-listed companies.
Beyond mathematical models, qualitative factors play an important role in determining the DLOM. These factors enable a differentiated assessment of the specific situation of the company being valued.
Company-related Factors
The financial stability and size of the company significantly influence the DLOM. The more solid the financial position and the larger the company, the lower the discount tends to be.
Company-related Risks
These include particularly the dependence on key persons, high customer concentration, management quality, and special operational risks. These individual risk factors can significantly influence the DLOM.
Market and Industry Factors
General market conditions and the specific situation in the respective industry are further important evaluation criteria. Factors such as competitive intensity, market growth, and economic cycle play a decisive role.
Legal Framework
Special importance is attached to legal and contractual restrictions. These include transfer restrictions in shareholder agreements, pre-emptive rights, or regulatory requirements that can additionally restrict the tradability of shares.
The DLOM is a central element of business valuation and fulfills several essential functions. As a valuation discount, it significantly contributes to considering liquidity risk, which plays an important role especially in non-listed companies.
For the valuation of non-listed companies, the DLOM is of particular importance as it reflects the limited marketability of shares compared to listed stocks. This leads to a more realistic assessment of the actual company value and enables a more precise valuation of assets.
In practice, the DLOM is particularly frequently used in succession planning when company shares are to be transferred. It is also an important valuation parameter in legal disputes, such as in squeeze-out procedures or in the compensation of departing shareholders.
According to IDW S 1 principles, the DLOM contributes to improving valuation accuracy. It enables a methodologically sound adjustment of company value to actual market conditions and thus meets the requirements for proper business valuation.
In business valuation, both DLOM and DLOC (Discount for Lack of Control) play important roles but fulfill different functions. While DLOM considers the limited tradability of a company share, DLOC reflects the reduced value of a minority interest resulting from the lack of control and co-determination possibilities. Both discounts can be applied cumulatively in a valuation as they reflect different economic circumstances.
The determination of DLOM presents valuers with various methodological and practical challenges. A central problem lies in the subjectivity of estimation: There is no generally accepted calculation method, which leads to significant differences in estimates. Different valuers can use different models, assumptions, or benchmarks, resulting in varying discounts.
Another difficulty arises from limited data availability. Private companies do not have the same wealth of market data as listed companies. This lack of comparable sales or transaction data for similar companies makes precise estimation of DLOM difficult.
The choice of appropriate valuation model presents an additional challenge. Since there is no universally recognized calculation method, different approaches and models can lead to different results.
Particularly critical is the risk of over- or underestimating the discount. Too high a DLOM can lead to significant undervaluation of the company and thus to unfair results in transactions. Conversely, underestimating DLOM can inflate company value and lead to unrealistic expectations among sellers or shareholders.
The DLOM has established itself as an indispensable instrument in business valuation. Its particular significance lies in the methodologically sound capture of limited tradability of company shares. Through the combination of quantitative and qualitative valuation approaches, DLOM enables fair and realistic value determination that does justice to the specific characteristics of non-listed companies.
Despite the methodological challenges in its determination, DLOM contributes significantly to the quality of valuation results. It not only supports price discovery in corporate transactions but is also of great practical relevance for succession planning and legal disputes. Its application corresponds to both the professional standards of valuation practice and the requirements of tax authorities and courts.
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