How market volatility may affect valuation discounts for lack of marketability
When determining how much a business is worth, a valuation professional must evaluate current market conditions — and today’s marketplace is full of uncertainties. Top concerns among business leaders in the third quarter of 2025 included tariffs, monetary policy, inflation and the availability of skilled workers, according to The CFO Survey, a collaboration of Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta.
Recent market volatility may well translate into higher discounts for lack of marketability (DLOMs) because investors typically pay less as liquidity risk and uncertainty rise. However, there’s a silver lining to higher discounts: They provide an opportunity for wealthy individuals to gift private business interests at significant discounts, potentially saving a substantial amount in taxes.
What’s a DLOM?
Marketability is the ability to quickly or readily convert property to cash at minimal cost, according to the International Valuation Glossary — Business Valuation. Also implied is a high degree of certainty that an expected selling price will be realized.
The two most popular sources of empirical data that valuators use to support DLOMs are restricted stock and pre-initial public offering (IPO) studies. These studies suggest that discounts for minority interests in private companies range from 30% to 50%. But DLOMs can vary significantly depending on the specific characteristics of the subject business interest.
How do valuators incorporate market volatility into DLOMs?
High volatility typically lowers marketability by making investments less attractive. But estimating private stock price volatility can be difficult because there aren’t published stock prices for privately held shares — and private transactions are few and far between. Recently, valuators have turned to public volatility metrics to capture the specific effect volatility has on private marketability discounts.
One popular gauge of market volatility is the Chicago Board Options Exchange Volatility Index® (VIX®). The VIX measures the expected volatility of the Standard & Poor’s (S&P) 500 index options over the next 30 days. Also known as the “fear index,” the VIX tells whether investors expect sharp changes in market prices — either upward or downward.
What other factors affect marketability?
Volatility is just one factor that affects marketability. Other considerations when estimating DLOMs include:
Put rights. These create a market for transferring ownership and, therefore, support lower discounts.
Pool of potential buyers. Business interests that have more potential investors generally warrant lower discounts.
Size and financial performance. Small companies, startups and underperforming companies may be perceived as high-risk ventures that warrant higher discounts.
Size of the block. Large blocks of stock typically take longer to sell and have fewer potential buyers, justifying higher discounts.
Imminent sale or public offering. These situations effectively create a market for the subject company’s stock, which can lower the discount.
Availability of financial data. Companies without timely, accurate financial reports may warrant higher discounts.
Restrictions on ownership rights. Buy-sell agreements and other contractual provisions that restrict ownership transfers or set a fixed price for buyouts may increase discounts.
Dividends. Empirical studies show that dividend payments increase the desirability of a given investment and, therefore, reduce discounts.
Valuators may consider these same factors in other parts of their analyses. For example, these considerations may come into play when quantifying the discount for lack of control, a blockage discount or the cost of equity (under the income approach). To avoid undervaluing a business interest, it’s important not to double-count risk factors.
What’s right for your situation?
When quantifying a DLOM, valuators must look beyond medians or averages from empirical studies. It’s essential to customize the transaction data from these studies to fit current market conditions and the characteristics of the subject company. Contact us to learn more.
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