Understanding DLOM

Many private-company valuations incorporate a discount for lack of marketability, or DLOM, a metric that some owners may be unfamiliar with. It is not a penalty or a judgment about the business. It’s a necessary adjustment to recognize that a share in a private company isn’t worth quite as much as an identical claim on a public, listed business that can be bought or sold almost instantaneously on an exchange.

Formal appraisers have used some version of this discount for decades, and the research behind it is unusually well-developed for a single valuation adjustment. However, because it’s often applied at the very end, after all other calculations are complete, it’s easy for an owner reading a valuation to miss the purpose of the private-company discount or to question whether the specific percentage used is defensible.

What DLOM actually measures

A publicly traded company’s shares can be sold in seconds at a price anyone can see to any one of thousands of willing buyers. A private business doesn’t have that: no ready market, no daily price, no guarantee that a buyer even exists. Finding one, negotiating a price, conducting due diligence, and closing a deal can take months, sometimes years. That difference in how easily an asset converts to cash is called marketability, and it has a real, measurable effect on what a rational buyer will pay.

DLOM is the mechanism valuation uses to price that difference. It’s a percentage discount applied to what the business would otherwise be worth if it traded as easily as a public stock. A 25% DLOM doesn’t mean the business is “worth 25% less” in any abstract sense. It means a buyer, all else equal, pays that much less because converting their investment back into cash isn’t quick, guaranteed, or frictionless.

Where a base rate like 25% actually comes from

DLOM analysis relies on empirical evidence rather than subjective percentages. Two key sources of this evidence are restricted-stock studies and pre-IPO studies. The Mandelbaum v. Commissioner Tax Court decision is particularly influential because it set out a framework for considering company-specific factors rather than simply adopting an industry-wide average.

A key caveat is that these studies technically measure the discount on a minority stake in a company that is otherwise freely tradable. This differs from the discount applied to the outright sale of an entire small private business. This imprecision has been a long-standing issue in the valuation industry, including in the Mandelbaum decision, which also relies on these studies in this way. It is not specific to any particular methodology or tool. The key branches of studies are:

• Restricted stock studies:the SEC’s 1971 study, Standard Research Consultants’ 1978–82 study, and others through the 1990s compare the price of a public company’s freely tradable shares with the price of its own shares that are contractually restricted from trading for a period. Individual study averages range roughly from 25.8% to 45%, with the aggregate commonly cited at 33–35%. The Mandelbaum decision itself describes restricted-stock discounts as running “from 10% to 70%, with a middle ground of about 35%.” (Business Valuation Resources).
• Pre-IPO studies:Willamette Management Associates, Emory, 1980–2000 compared private transactions in a company’s stock with the price its shares later fetched once it went public. These were higher and more variable: one set of studies found a mean/median around 46%/47%; another’s yearly averages ranged 31.8%–73.1%, with a long-run average near 50% (Acquiry).

Modern practitioner guidance for private-company work narrows this to a more usable range: roughly 15%–40%, depending on company-specific factors, with restricted-stock-based discounts typically 20–35% and pre-IPO-based discounts 40–60% (Sofer Advisors).

BusinessWurth’s 25% base rate sits within the 15%–40% range commonly used in practitioner guidance, while deliberately sitting below the historical averages produced by many of the older pre-IPO studies. It serves as a moderate and justifiable starting point, not an outlier on either side.

Why one flat number doesn’t hold up

Courts and reviewers clearly state that applying a uniform average or median discount across all businesses isn’t valid. Mandelbaum’s main contribution wasn’t the 35% figure itself, but developing a list of factors that can adjust a company’s valuation up or down based on specific empirical data, tailored to each business (Business Valuation Resources; BSTco).

BusinessWurth’s risk questionnaire operates on a similar principle. Your responses build on the 25% base rate: each named factor that would make the business harder to sell adds to it, and a few strengths can offset those additions. The factors include:

• How long the business has been operating, and how many people it employs
• Whether the owner is involved in the business full-time and how much the daily operations rely on them
• Whether key processes are formally documented or primarily known by a single individual
• Ownership of the premises and the degree of the business’s reliance on a specific location
• Any restrictions on transferring ownership, and whether the business has a policy to buy back a departing owner’s stake
• How much earnings have varied from year to year around their own trend, so steady growth is not counted as volatility (needs three or more years of history)
• How much revenue is concentrated with a single customer or contract, and how hard that customer would be to replace
• How much revenue repeats without winning new business, and whether it rests on contracts or on personal relationships
• Whether the business depends on a single hard-to-replace supplier
• Whether the business can pass cost increases on to its customers
• Whether its operations have changed fundamentally in the last three years

Each factor indicates whether the business interest is easier or harder to transfer and monetize, and therefore whether a higher or lower marketability adjustment is warranted. The total discount never falls below the 25% base and never exceeds 40%, regardless of how the factors combine. What matters for confidence in the DLOM adjustment is that the discount changes in a transparent, principled, and well-explained way.

The 25% floor is deliberate. BusinessWurth’s valuation methods draw their multiples and discount rates from listed companies, and DLOM is the one step that converts those public-market figures into a value for a privately held business. Even the best-run private business is still private, so strengths such as documented processes or a buy-back policy can cancel out other factors, but they do not take the discount below the base.

Worked example: two businesses, two different discounts

Base rates are best illustrated through two contrasting businesses that share the same pre-DLOM valuation. The examples below are fictional and meant to demonstrate the mechanism; they are not actual BusinessWurth customers.

Alder & Finch Consulting has been operating for 14 years and has about 15 employees led by three senior partners. Each partner manages key client relationships, ensuring the business can continue smoothly if one is absent. The firm has documented service playbooks and onboarding procedures. Most revenue comes from multi-year retainers, its largest client accounts for just 12% of revenue, and profits have remained steady over the past five years.

Rivergate Signage has been operating for four years with the owner and two or three staff members. The owner manages all client relationships and most of the design work, while much of the company’s knowledge remains informal and is stored mainly in her memory. Its largest client accounts for 45% of revenue and would be difficult to replace. More than half of revenue comes from repeat business, driven mostly by personal relationships rather than contracts, and earnings have fluctuated from year to year.

Each factor increases or decreases the 25% base, and the effects are totaled. Alder & Finch’s factors add up to about 31%. Rivergate’s would reach roughly 40%—the maximum discount any business can receive—so it is capped at the 40% ceiling. (These are illustrative results based on BusinessWurth’s own scoring rules, demonstrating how the mechanism works.)

Applied to the same $2,000,000 pre-DLOM figure, that’s the difference between:

The $180,000 difference doesn’t come from using different valuation methods. It comes from the different marketability characteristics of the two businesses. Buyers would price in this ease regardless of the valuation approach.

Applied once, at the end, not per method

For BusinessWurth’s valuation framework, DLOM is applied once, after the six methods have been blended, so that marketability is treated as a separate valuation consideration rather than embedded repeatedly across the individual methods.

This is important because DLOM addresses a specific issue: how much illiquidity alone lowers the price a buyer would pay for a business. Incorporating it into each valuation method separately would require re-evaluating the same question multiple times in slightly different ways, risking double-counting or inconsistent adjustments that reflect the business as a whole rather than any specific approach.

Applying DLOM once, at the end, ensures each of the six methods—focused on earnings, cash flow, assets, or comparable sales—remains true to what it measures. It also keeps the marketability issue clearly separate and fully disclosed.

Common misunderstandings about DLOM

Thinking DLOM is a penalty for business faults. It isn’t. Even a well-managed, profitable, and growing business receives a marketability discount, which indicates how easily the investment can be converted to cash, rather than the business’s overall quality. A business with solid management, documented processes, diverse customer base, and fewer transfer restrictions will carry a lower marketability adjustment than a similar business that relies heavily on a single owner or customer, but never one below the base rate.

Assuming a single percentage, such as 35%, applies universally to all private businesses. Academic research behind DLOM provides a range of values rather than a definitive answer. A labeled factor list positions a specific business within that range instead of relying solely on the average.

The discount should appear within each method’s respective multiple. However, as previously noted, it is only applied once at the end to the blended figure. A method table showing an EBITDA multiple or a DCF result displays the pre-DLOM calculations, not the final value.

Treating a business-sale discount and a minority-share discount as the same is inaccurate. They are related but distinct issues, and the important caveat mentioned earlier—most underlying research focuses on a minority block of tradable stock—should be kept in mind if this figure is ever discussed with a buyer, lender, or advisor.

Where BusinessWurth fits

BusinessWurth applies DLOM as the literature recommends: a documented, moderate base rate, tailored to your specific business through a set of questions, never fixed for all customers, and not hidden within any single method’s calculations. The 25% base is shown in every fact sheet, along with how your answers shifted the number and by roughly how much; the result always falls between 25% and 40%. This is part of a broader approach: DLOM is the final adjustment on the combined valuation figure, which is calculated by BusinessWurth’s six valuation methods, each weighted and disclosed separately.

This article offers general information and does not constitute financial, tax, or legal advice. The BusinessWurth valuation fact sheet is an estimate intended for informational use only — it is not a certified valuation, formal appraisal, or fairness opinion, and should not be used as the only basis for any transaction, financing, tax, legal, or other decision.