What are Discounts for Lack of Marketability (DLOM)?
Discounts for Lack of Marketability (DLOM) refer to valuation discounts applied to shares that are not readily marketable, typically found in privately held companies or in restrictions placed on publicly traded shares. The premise is straightforward: shares that are harder to sell (lack marketability) are worth less because buyers compensate for the added risk and inconvenience.
The Mechanics Behind DLOM
The restricted stock method is perhaps the best theatrical analogy here: imagine public shares and their restricted counterparts as twin sibs, where the restricted twin is not allowed to go to the stock market ball. The difference in their social lives (prices) hinges purely on accessibility—or lack thereof.
On the flip side, the IPO method compares the shy, before-debut share prices to their outgoing, post-IPO selves, with the spotlight finding favor in liquidity. The greater the price leap post-IPO, the steeper the DLOM.
Crowning this calculated approach is the option pricing method. Here, the price of an option (which is quite the diva) and the strike price star in a valuation drama where the option’s price tag as a fraction of the strike price pinpoints the DLOM.
Studies and Surveys: The Range of DLOM
Gather round: the collective wisdom derived from numerous papers and studies generally pins the DLOM between 30% to 50%. Yes, quite the bracket!
The Challenges of Non-Marketability
Our protagonist, the privately held share, faces quite the odyssey when it comes to selling. Unlike its publicly traded siblings, it endures a long, uncertain journey fraught with legal hindrances, lack of buyer enthusiasm, and potential tax traps—the dragons of the financial realm, if you will. Consequently, this warrants a discount, because what’s risk without a little fiscal compensation?
Related Terms
- Marketability: The ease with which an asset can be bought or sold in the market.
- Private Shares: Shares owned in a company that is not publicly traded.
- IPO Pricing: The setting of a share’s price before it is publicly traded.
- Valuation Discount: A reduction applied to the value of an asset to reflect various risks or illiquities.
Further Study
- “The Dark Art of Valuation” by Val U. Ranger, where marketability discounts meet sorcery.
- “IPOs Unveiled” by Mark Itupp, a tale of market transitions.
Allow yourself the chance to meander through the thicket of valuations with ‘Penny Wise’. You might end up more market-savvy than you began, ready to tackle the arcane art of Discounts for Lack of Marketability with aplomb and a snappy calculator.
