What is the DLOM?
The Discount for Lack of Marketability (DLOM) is a valuation discount applied to an ownership interest that cannot be readily sold or converted into cash at the same price as a comparable marketable interest. It reflects the economic costs, uncertainty and time associated with the limited ability to sell a privately held or otherwise restricted investment.
Determining the DLOM
Determining the DLOM is one of the more challenging tasks in business valuation because the lack of marketability of a company share cannot be directly observed. Various approaches have therefore become established in practice, which can be broadly 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.
There is no universally applicable DLOM percentage. Empirical studies provide useful reference points, but the appropriate discount must be supported by the specific facts and circumstances of the valuation.
For orientation, published restricted-stock and pre-IPO studies have produced DLOMs ranging broadly from approximately 13% to 45%, with older studies often reporting higher discounts than more recent studies (Ransome & Satchit, 2009).The IRS’s review of historical studies likewise shows average or median discounts ranging from 13% to 45% across different samples (IRS, 2009).
These figures should therefore be treated as empirical benchmarks rather than default valuation inputs.
Factors influencing the DLOM
The appropriate DLOM can be influenced by factors including:
- Expected holding period: A longer period before liquidity generally increases the discount.
- Company size and financial strength: Larger and financially stronger companies may attract a lower discount.
- Expected liquidity event: An identifiable IPO, sale or other exit can reduce the discount.
- Volatility: Higher expected volatility can increase the value of the embedded liquidity option and therefore affect option-based DLOM estimates.
- Dividend yield: Expected distributions can affect the economics of holding an illiquid interest.
- Transfer restrictions: Contractual or legal restrictions can materially limit the ability to sell the interest.
- Market and industry conditions: General market liquidity and industry-specific conditions can influence the discount.
- Shareholder and ownership characteristics: The rights attached to the interest and the availability of potential buyers can affect marketability.
Quantitative Approaches
In valuation practice, three key quantitative methods have become established for determining the DLOM:
The Restricted Stock Method
This method determines the DLOM by comparing the price of shares with sales restrictions to the price of freely tradable shares of the same company. The restrictions refer to specified periods during which the shares may not be transferred or sold.
Restricted-stock studies are among the oldest empirical sources for estimating marketability discounts. Historical studies have reported substantial variation in observed discounts, reflecting differences in sample composition, market conditions and regulatory restrictions (Koeppel, 2026).
The IPO Method
The IPO method is based on comparing share prices before and after an initial public offering. The price difference between pre-IPO and post-IPO transactions can provide evidence of the discount attributable to limited marketability.
The approach is intuitive, but the observed price difference may reflect factors beyond marketability. The timing of the transaction, changes in company fundamentals and the terms of the respective financing rounds therefore need to be considered.
The Option Pricing Method
The Option Pricing Method (OPM) uses an option-pricing framework to estimate the DLOM. The approach treats the ability to sell the underlying asset after a period of illiquidity as economically comparable to a put option.
The following key parameters flow into the valuation:
- The volatility of the underlying asset, measuring price fluctuations over time
- The expected period until the liquidity event, i.e. the duration of limited marketability
- The company’s dividend yield
- The risk-free interest rate as a reference value
The option-pricing approach includes models such as the Chaffe model, the Finnerty average-strike put model, and the Asian protective put model. More recent research has also examined the term structure of DLOM for different restriction periods. Finnerty’s 2025 study, for example, estimates DLOM term structures using 5,333 private-equity placement transactions and finds that marketability discounts vary systematically with the length of the restriction period (Finnerty, 2025).
These factors together contribute to estimating the illiquidity discount for non-listed companies.
Qualitative Approaches
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.
Role in Business Valuation
The DLOM is a central element of business valuation and fulfills several essential functions. As a valuation discount, it contributes to considering liquidity risk, which plays an important role especially for non-listed companies.
For the valuation of non-listed companies, the DLOM is of particular importance because it reflects the limited marketability of shares compared with listed stocks. This can lead to a more realistic assessment of the value of an individual ownership interest.
In practice, the DLOM can be particularly relevant in succession planning when company shares are transferred. It may also be an important valuation parameter in legal disputes and other situations involving the valuation of privately held interests.
✅ Related reading: For a broader discussion of ownership-level discounts, see our article on DLOC and its significance in business valuation. The DLOM should also be distinguished from the equity allocation methods for different share classes, particularly where preferred and common shares carry different economic rights.
DLOM vs. DLOC
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 reflect different economic circumstances. However, they should not simply be added together mechanically. Their application depends on the valuation premise, the level at which the valuation is performed and whether the underlying valuation already incorporates the relevant characteristics of the interest.
Challenges
The determination of DLOM presents valuers with various methodological and practical challenges. A central problem lies in the subjectivity of the 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 an 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 ownership interest and thus to unfair results in transactions. Conversely, underestimating DLOM can inflate the value and lead to unrealistic expectations among sellers or shareholders.
Wrap it up!
he DLOM has established itself as an important instrument in business valuation. Its particular significance lies in capturing the economic impact of the limited marketability of company shares.
Through the combination of quantitative and qualitative valuation approaches, DLOM can support a fair and realistic value determination that reflects the specific characteristics of non-listed companies.
However, the available empirical evidence demonstrates why a standard DLOM percentage should not be applied mechanically. Published studies show substantial variation in observed discounts, and newer research indicates that factors such as the expected restriction period can materially affect the result (cf. Finnerty, 2025; Koeppel, 2026).
The appropriate DLOM should therefore be supported by the selected methodology, empirical evidence, company-specific factors and the circumstances of the valuation date.
Reference
- Finnerty, J. D. (2025). The Discount for Lack of Marketability Term Structure. Journal of Financial Research, 48(4), 1738–1764.
https://doi.org/10.1111/jfir.12457 - P. Ransome & Satchit. (2009). Valuation Discounts for Estate and Gift Taxes. Journal of Accountancy. https://www.journalofaccountancy.com/issues/2009/jul/20091463/
- Michael R. Koeppel (2026). Heightened Duty of Court-Appointed Neutrals in Business Valuation. American Bar Association.
- Internal Revenue Service (IRS). Discount for Lack of Marketability (DLOM). https://www.irs.gov/pub/irs-lbi/dlom.pdf
Updated at 12 August 2026
