Understand:

Discounts for Control and Marketability

Value is in the eye of the beholder, right?
And when looking at certain assets – especially minority ownership in privately held companies – those assets are worth less than a simple fraction of the whole. Why? Read on.

Understanding DLOM and DLOC

When performing valuations, part of our analysis includes whether and to what extent the portion of the entity being valued should be subject to discounts. The two most common are the Discount for Lack of Control (“DLOC”) and the Discount for Lack of Marketability (“DLOM”).

Discount for Lack of Marketability

In the landmark case Mandelbaum (Bernard Mandelbaum, et al. v. Commissioner, T.C. Memo 1995-255), Judge Laro sets out ten factors that should be considered in applying a DLOM:

  • The value of a similar corporation’s public and private stock
  • An analysis of the Company’s financial statements
  • The Company’s dividend-paying capacity and payment history
  • The nature of the corporation, history, industry position, and economic outlook
  • Management
  • Degree of control transferred
  • Restrictions on transferability
  • Investor’s holding period
  • The Company’s redemption policy
  • Costs associated with a public offering of the stock
  • These items are often the basis for applying a DLOM.

Discount for Lack of Control

A controlling ownership interest is typically more valuable than a pro-rata share of a minority interest. This is because the minority owner does not have control over important business decisions like declaring dividends, determining compensation, setting policies and deciding to sell or liquidate. To account for this disadvantage, an appraiser can apply a discount for lack of control to a minority interest. Factors that may indicate control, or a lack thereof, include:

  • elect directors and appoint management
  • determine management compensation and perquisites
  • set policy and change the course of business
  • acquire or liquidate assets
  • select people with whom to do business and award contracts
  • make acquisitions
  • liquidate, dissolve, sell out, or recapitalize the company
  • sell or acquire treasury shares
  • register the company’s stock for a public offering
  • declare and pay dividends
  • change the articles of incorporation and bylaws

Example

Below is an example calculating, on a minority, non-marketable basis, a 30% interest. Given a company with an EV of $10million, the 30% pro rata share, after the appropriate discounts, is valued at $1.6million.

$10,000,000 100% Enterprise Value (1,000 shares)
$3,000,000 30% Pro-rata Value (before discounts)
($690,000) Less: DLOC (23%)
$2,310,000 Minority, Marketable Value
($680,300) Less: DLOM (30%)
$1,619,700 Minority, Non-Marketable Value
Discounts apply when valuation is diminished based on control or marketability factors

Get in Touch

*Required

What's Next:

How can Quantive Help?

Our Exit Planning Program is designed to help ownership proactively plan for their “third act” – life after business.  It starts with our gap analysis program: Launch Pad. 

Our Recent Writing on Exit Planning

  • 5 Steps to Selling Your Business

    5 Steps to Selling Your Business

    Selling a business can be a stressful event.  Given the size of the asset – and likely it’s importance to your retirement – you can just imagine that there are going to be some […]

  • Lenders Speak:  “Getting the Deal Done”

    Lenders Speak: “Getting the Deal Done”

    Great event this morning!  Thanks so much to Mark Moore and Adam Nalls of Access National Bank, as well as Bruno De Faria of M&T Bank, for providing some great insights into the lending […]

  • Stop Asking for Easy

    Stop Asking for Easy

    If you’ve ever sat through a talk I’ve given or, as a business owner, sat with me one-on-one talking about exit planning, there is a 100% chance that you’ve heard me talk about how […]

Business Valuation Purposes

BUY-SELL AGREEMENTS

Quantive performs business valuations in support of buy-sell agreements, to include buy-ins and -outs, as well as shareholder disputes.

VALUATIONS FOR DIVORCE

We perform business valuations in support of divorce proceedings, working either jointly retained or on behalf of one spouse.

PURCHASE AND SALE

Smart entrepreneurs routinely retain Quantive to understand price early and gain a roadmap for impending price negotiations.

LITIGATION SUPPORT

We provide litigation support for shareholder disputes, lost profits, shareholder oppression, commercial litigation, and various other reasons.

ESTATE AND GIFT

We perform valuations in support of various gifting strategies, as well as in support of probate requirements.

SBA LOANS

Quantive is qualified to perform valuations in support of SBA financing. Our reports are compliant with all SBA SOP’s.

INSURANCE

Quantive values companies for a variety of reasons related to insurance to include establishing values for funding buy-sell agreements.

OTHER

We perform valuations for business planning, gap analysis, lost profits and damages, and a variety of other reasons.

X