Discount for Lack of Marketability - Comphrensive Study
1. DLOMDiscount for Lack of Marketability
September 2015
Alps Venture Partners
A M E R I C A S | A S I A PA C I F I C | E U R O P E M E N A
2. Discount for Lack of Marketability
1pageA L P S V E N T U RE P A R T N E R S
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Marketability is defined in the International Glossary of Business Valuation Terms as “the ability
to quickly convert property to cash at minimal cost”. Some texts go on to add “with a high degree of
certainty of realizing the anticipated amount of proceeds”.
A Discount for Lack of Marketability (DLOM) is “an amount or percentage deducted from the value
of an ownership interest to reflect the relative absence of marketability.”
Chaffe Model Finnerty Model
In Protective Put Approach, the cost of a put option
calculated at the money acts as an estimate for the discount
for lack of marketability. The value of the put option is
calculated using the Black-Scholes Option Pricing Model. A
put option provides a buyer the right but not the obligation
to sell the investment held by him at the strike price of the
put option. By purchasing a put option, the buyer ensures
the liquidity of his investment as he now has the right to sell
the investment at the strike price of the put option.
This model assumes the investor is able to purchase an
“average-strike” put option (an “Asian” put). The payout on
an Asian put is based on the average value of the underlying
share over a period of time, rather than the final value. It
reflects investors’ inability to time the market by eliminating
the ability to earn average trading profits. This cost of put
option becomes the implied discount for an investor holding
stock of a privately-held firm, as this stock lacks
marketability.
3. Discount for Lack of Marketability
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Given two identical business interests, a higher price will be paid by investors in the market for the
business interest that can be converted to cash most rapidly, without risk of loss in value. Some
factors that influence the magnitude of the DLOM include:
• Prospects for liquidity (the greater the prospects, the lower the discount would tend to be)
• Restrictions on transferability of equity securities by the holder. (the lesser the extent and duration of any
such restrictions, the lower the discount would tend to be)
• Size and timing of distributions (the greater the amount of dividends paid to the securities, the lower the
discount would tend to be (typically not a factor for early-stage enterprises but possibly a factor for more
mature enterprises)).
• Concentration of ownership. (The higher the concentration of ownership (for example, among founders or
one or two investors), the higher the discount would tend to be.)
• Length of time to a liquidity event (a longer holding period increases the DLOM)
• Expected volatility of the security (higher volatility increases the DLOM)
• Dividend payouts (frequent cash dividends lower the DLOM)
• Methodology utilized to estimate the pre-DLOM equity value
4. Americas
3pageA L P S V E N T U RE P A R T N E R S
Industry / Years 0.25 0.5 1 2 5
Consumer Staples 11.1% 14.3% 22.1% 27.9% 31.5%
Information Technology 11.7% 15.4% 22.8% 30.8% 41.2%
Utilities 7.0% 9.4% 15.8% 18.1% 22.1%
Industrials 9.9% 13.7% 20.2% 27.2% 36.5%
Consumer Discretionary 9.8% 13.1% 19.1% 26.0% 34.7%
Healthcare 13.0% 18.2% 25.9% 35.3% 47.3%
Financials 7.2% 10.0% 11.6% 15.7% 26.0%
Energy 14.5% 18.2% 28.4% 35.8% 46.9%
Materials 15.9% 21.2% 31.5% 43.0% 57.5%
Telecommunication Services 9.9% 13.6% 21.0% 26.4% 35.1%
Industry / Years 0.25 0.5 1 2 5
Consumer Staples 6.3% 8.1% 12.3% 15.0% 17.9%
Information Technology 6.7% 8.8% 12.7% 16.7% 22.4%
Utilities 4.0% 5.3% 8.9% 10.2% 13.4%
Industrials 5.7% 7.8% 11.3% 14.8% 20.4%
Consumer Discretionary 5.6% 7.5% 10.8% 14.3% 19.8%
Healthcare 7.5% 10.3% 14.4% 19.0% 24.6%
Financials 4.2% 5.7% 6.7% 9.1% 15.9%
Energy 8.3% 10.3% 15.6% 19.1% 24.5%
Materials 9.1% 11.9% 17.2% 22.2% 27.6%
Telecommunication Services 5.7% 7.7% 11.6% 14.3% 19.3%
Chaffe Model DLOM
Finnerty Model DLOM
5. Europe, MENA & Africa
4pageA L P S V E N T U RE P A R T N E R S
Industry / Years 0.25 0.5 1 2 5
Consumer Staples 8.5% 11.8% 14.6% 19.8% 26.6%
Information Technology 10.0% 14.1% 18.7% 25.7% 33.7%
Utilities 8.9% 12.3% 16.3% 22.2% 31.2%
Industrials 8.9% 12.6% 16.0% 22.5% 30.8%
Consumer Discretionary 9.0% 13.1% 17.1% 23.6% 32.9%
Healthcare 10.0% 14.5% 18.5% 25.5% 33.5%
Financials 7.9% 11.3% 14.2% 20.5% 28.9%
Energy 11.6% 16.4% 22.7% 29.4% 39.9%
Materials 10.7% 15.1% 19.2% 25.9% 36.4%
Telecommunication Services 9.3% 12.9% 16.4% 22.9% 30.2%
Industry / Years 0.25 0.5 1 2 5
Consumer Staples 4.9% 6.7% 8.3% 11.4% 16.5%
Information Technology 5.8% 8.1% 10.6% 14.4% 19.9%
Utilities 5.1% 7.0% 9.3% 12.6% 18.5%
Industrials 5.1% 7.2% 9.1% 12.8% 18.5%
Consumer Discretionary 5.2% 7.5% 9.7% 13.3% 19.3%
Healthcare 5.7% 8.2% 10.6% 14.4% 19.7%
Financials 4.6% 6.5% 8.1% 11.7% 17.2%
Energy 6.6% 9.3% 12.8% 16.3% 22.4%
Materials 6.2% 8.6% 10.9% 14.6% 20.9%
Telecommunication Services 5.4% 7.3% 9.3% 13.1% 18.3%
Chaffe Model DLOM
Finnerty Model DLOM
6. Asia Pacific
5pageA L P S V E N T U RE P A R T N E R S
Industry / Years 0.25 0.5 1 2 5
Consumer Staples 10.9% 14.5% 17.2% 22.1% 30.2%
Information Technology 12.9% 16.8% 20.8% 27.1% 36.7%
Utilities 11.4% 14.9% 17.1% 21.5% 29.2%
Industrials 12.0% 15.7% 18.5% 24.0% 32.6%
Consumer Discretionary 11.8% 15.8% 18.6% 24.2% 33.7%
Healthcare 13.2% 17.4% 20.8% 26.8% 36.3%
Financials 10.6% 14.6% 17.1% 22.8% 33.1%
Energy 13.1% 17.8% 23.2% 30.0% 40.9%
Materials 13.0% 17.4% 21.7% 28.7% 37.8%
Telecommunication Services 10.2% 14.2% 17.3% 23.3% 33.6%
Industry / Years 0.25 0.5 1 2 5
Consumer Staples 6.2% 8.3% 9.8% 12.7% 18.5%
Information Technology 7.4% 9.5% 11.8% 15.4% 21.6%
Utilities 6.5% 8.5% 9.8% 12.5% 17.9%
Industrials 6.9% 8.9% 10.5% 13.8% 19.7%
Consumer Discretionary 6.7% 9.0% 10.6% 13.9% 20.2%
Healthcare 7.6% 9.9% 11.8% 15.2% 21.3%
Financials 6.1% 8.3% 9.7% 13.1% 19.9%
Energy 7.5% 10.1% 13.0% 16.6% 22.7%
Materials 7.4% 9.9% 12.3% 16.0% 21.8%
Telecommunication Services 5.9% 8.1% 9.8% 13.2% 19.6%
Chaffe Model DLOM
Finnerty Model DLOM