Evaluating marketability when valuing controlling business interests
When investing in a business, the buyer considers how easily the interest can be converted to cash. However, transferring private business interests isn’t necessarily quick or easy — even if you own the entire company or a controlling block of the outstanding shares. Here’s a closer look at how business valuation professionals address the issue of marketability and how a state appellate court recently handled it for a divorce case involving a controlling business interest.
What’s a discount for lack of marketability?
In a business valuation context, “marketability” refers to the ability to quickly convert property to cash at minimal cost. While publicly traded stocks are readily marketable, interests in private companies typically require substantial time, cost and effort to sell. To the extent that public stock data is used to value private businesses, a discount may be warranted to reflect the lack of marketability.
Discounts for lack of marketability (DLOMs) are well established when valuing interests in closely held businesses that lack elements of control. Several empirical studies support and quantify DLOMs for noncontrolling interests. For example, restricted stock and pre-IPO studies demonstrate the spread between prices paid for freely traded shares and identical shares that are less marketable because they’re restricted or not yet publicly traded. Discounts typically average between 30% and 45%.
Should controlling interests be discounted?
Applying DLOMs to controlling interests is somewhat controversial, though courts have sometimes accepted them. While many argue that some discount should be available at all levels of control — even 100% — others say it’s inappropriate to apply a DLOM to a controlling interest.
The rationale behind taking these discounts on controlling interests is that fair market value is a cash-equivalent concept. In contrast, a future sale of a controlling interest is speculative and expensive. The deal also may include noncash terms, such as employment contracts, restricted stock or installment payments.
DLOMs applied to controlling interests are sometimes referred to as “illiquidity” discounts to help differentiate them from DLOMs on noncontrolling interests. When quantifying illiquidity discounts, valuation experts consider the time, costs and risks of selling the business (or a controlling interest within it). Alternatively, they may estimate the costs of going public. No official empirical data exists to support DLOMs on controlling interests. But all else being equal, most experts agree the discount for a controlling interest should generally be lower than for a noncontrolling interest in the same company.
Are courts open to illiquidity discounts?
A recent state court case provides an interesting example. In February 2025, the Iowa Court of Appeals issued a ruling that addresses this issue. It affirmed the trial court’s valuation of a roofing business that was part of a marital estate. The value included a 20% DLOM. (In re Marriage of Nelson, No. 23-1893, Iowa Ct. App., 2025.)
When the couple set up their business, they allocated 51% ownership to the wife and 49% to the husband to take advantage of the benefits of operating as a female-owned company. For the divorce, both spouses hired valuation experts, but they arrived at widely divergent conclusions on the business’s value. The wife’s expert estimated a valuation range between $251,000 and $275,000, after applying a 20% DLOM. The husband’s expert valued the business at $3.6 million and didn’t apply a DLOM.
The trial court awarded the business to the wife and valued it at $1.5 million, including a 20% DLOM. The appellate court upheld the lower court’s valuation, finding it was within the range of permissible evidence. The court noted that the application of a DLOM was consistent with Iowa precedent that “has affirmed discounting the valuation of a closely held business or its stock in a property division when there is no ready market.”
For more information
The application and magnitude of DLOMs are matters of professional judgment, particularly when valuing controlling interests. Contact us for help supporting or challenging the use of valuation discounts for a specific case.
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