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Lack of Marketability and Lack of Control Discount Rates. What are the typical ranges of discounts for both of the discounts in markets tod

Discount For Lack Of Control & Marketability


Topic Expert
Tom Pai
Title: CFO consultant
Company: Sunstone Group
(CFO consultant, Sunstone Group) |

Discounts have to factor in all the specifics.
- How illiquid is the investment? As we've seen with Facebook, not being public does not mean there's no liquidity. Also how near a planned exit (such as IPO or sale of the company) matters.

- A minority share does not mean absolute no control. Preferred shares often have very strong control mechanisms despite holding a minority interest on a fully diluted basis.

The valuation reports I've seen over the years will provide discounts of up to 80%. But they typically range from 20% - 50%. As you can see there really is no "typical".

You really should consult valuation professionals to help you determine this. They have very specific methodologies and metrics based on codified standards to answer such questions.

One additional point I'd like to point out is that smaller discounts for marketability and control does NOT necessarily work in the interest of company management and employees of who hold common shares and options. One advantage of large discounts is that they tend to push down the fair value of the common stock and options. This means option grant strike prices can be lower.

There are many variables and tradeoffs to what is the best equity structure for a company.

Topic Expert
Jim Timmins
Title: Managing Director
Company: Teknos Associates
(Managing Director, Teknos Associates) |

Tom is correct, there are specific methodologies which have been devised to calculate the discount for lack of marketability (DLOM) or discount for lack of control(DLOC)that is appropriate to a particular company at a particular time. These methodologies have been developed in response to oversight by: the IRS, enforcing tax regulation, and the SEC and audit firms, enforcing accounting standards.

What is considered "acceptable" varies with circumstances (e.g. a large DLOM is more appropriate to an early stage company than to one preparing for an IPO) and depending on the regulator looking over a valuation report (e.g. the IRS accepts DLOCs, but generally the SEC does not). So, discounts really vary depending on each company's situation.

As Tom said, it's best to consult with a valuation professional -- who knows the methods for computing an appropriate discount, who has access to the regulatory standards, and who has experience with audit firm practices -- to pull it altogether in a valuation report which will survive review.

Topic Expert
Henry Schumann
Title: Manager FP&A
Company: Allscripts
(Manager FP&A, Allscripts) |

I sat through a presentation given by a valuation expert a couple of weeks ago. He indicated that his DLOC range has been 22-28% and his DLOM range has been 26-29% on recent engagements.


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