When valuing a privately held business, one of the key factors to consider is the level of marketability or liquidity of the business interest being valued. Private businesses are typically less liquid than publicly traded companies, which can make it more difficult to sell or transfer. As a result, business appraisers often apply a discount for lack of marketability (DLOM) to reflect the reduced value of a private business interest compared to a comparable public investment.
The DLOM represents the percentage reduction in value that reflects the perceived risk and difficulty of selling the business interest. The amount of the DLOM applied can vary depending on several factors, including the size and complexity of the business, the industry it operates in, the current economic climate, and the nature of the ownership interest being valued.
It's important to note that the application of a DLOM is not always appropriate or necessary in every business valuation. The decision to apply a DLOM should be based on a thorough analysis of the relevant market data used to derive the valuation multiples or discount rates.
For example, if the valuation multiples or discount rates are derived from public companies that are highly liquid and easily traded, the application of a DLOM may not be necessary. This is because the valuation multiples or discount rates already reflect the market's perception of the risks and liquidity associated with those types of investments.
Alternatively, if the valuation multiples or discount rates are derived from private companies or transactions involving non-controlling interests, it may be necessary to apply a DLOM to reflect the reduced marketability of the business interest being valued.
In summary, the application of a DLOM is an important consideration in business valuation, particularly for privately held companies. However, the decision to apply a DLOM should always be based on a careful analysis of the relevant market data and should be supported by sound professional judgment. The amount of the DLOM applied should reflect the specific risks and difficulties associated with the business interest being valued and should be justified by a thorough analysis of the relevant market data.
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