DLOM and DLOC: How Discounts Affect Your Business Value

Two of the most misunderstood concepts in business valuation are DLOM and DLOC—the discount for lack of marketability and the discount for lack of control. These discounts can reduce business value by 20-40% or more, dramatically affecting valuations used for tax planning, divorce settlements, litigation, and estate planning. Yet many business owners don’t understand what these discounts are, when they apply, or how to calculate them. This guide explains these critical valuation adjustments and how they affect what your business is worth.

Understanding DLOC: Discount for Lack of Control

A discount for lack of control (DLOC), also called a minority discount, applies when valuing a non-controlling interest in a business. The principle is straightforward: a 30% ownership interest in a company is worth substantially less than 30% of the fully-controlled value because the owner lacks the power to make decisions, direct management, declare dividends, or determine compensation.

Why DLOC Exists

Consider a business worth $10 million if it were entirely yours and you controlled all decisions. Now imagine owning 30% but another party owns 70% and controls the company. You can’t force a sale, demand a dividend, change management compensation, or alter business strategy. Your 30% stake gives you no control—you’re essentially a passive investor with no say in operations or cash flow extraction.

A minority shareholder in this situation would pay less than $3 million (30% of $10 million) because of that lack of control. The exact discount depends on the business, circumstances, and controlling owner’s behavior. Typical DLOC ranges from 20% to 40%, though it can be higher.

When DLOC Applies

DLOC applies in several common situations. If you’re valuing a minority ownership stake in a family business for estate tax purposes, a DLOC is typically applied because the minority owner lacks management control. In a divorce involving business ownership, valuing the non-controlling spouse’s interest usually involves a DLOC. In litigation involving shareholder disputes or partnership dissolutions, minority interests are frequently discounted. Even in gift tax situations, if you’re gifting a minority interest, a DLOC reflects the reduced value.

Quantifying DLOC: Mergerstat Data

Appraisers quantify DLOC using acquisition data, primarily through the Mergerstat (now Refinitiv) database, which tracks real-world business acquisitions. The analysis examines what controlling interests in similar companies have sold for as a percentage of pre-acquisition equity value. If comparable acquisitions suggest a 30% DLOC for your industry and business type, that percentage is applied to the value of a minority interest.

For example: If a controlling interest in similar businesses is worth $10 million, but Mergerstat data shows acquisitions typically occur at 70% of that value (reflecting a 30% control premium built into acquisition prices), then a minority interest worth $3 million (30% of the $10 million fully-controlled value) would be reduced by 30%, resulting in a value of approximately $2.1 million.

IRS Scrutiny of DLOC

The IRS carefully scrutinizes DLOC claims, particularly in family business valuations where aggressive discounting can significantly reduce estate tax liability. The agency requires appraisers to clearly document the discount, explain how it was calculated, justify it with market data, and address any specific facts about the business that might affect whether a discount is appropriate. Courts have sometimes reduced or rejected DLOC claims when appraisers simply applied standard percentages without addressing the specific circumstances.

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Understanding DLOM: Discount for Lack of Marketability

A discount for lack of marketability (DLOM) applies when valuing any business interest—control or minority—that cannot be immediately sold. Unlike publicly traded stock, which can be sold in seconds at the quoted market price, private business interests have limited markets and involve transaction costs, time delays, and uncertainty about finding buyers at desired prices.

Why DLOM Exists

Imagine you own 100% of a profitable business worth $5 million. However, it’s not publicly traded—selling it requires months or years of finding buyers, negotiating, conducting due diligence, and completing transactions. There’s uncertainty about the ultimate sale price, and you can’t instantly convert it to cash like public stock holders can.

This illiquidity affects value. A buyer purchasing your company wants to account for time, costs, and risk of the sale process. A DLOM reflects the economic reality that private business interests are worth less than their “as if freely traded” equivalent would be. Common DLOM ranges from 25% to 50%, depending on business characteristics, industry, and specific circumstances.

When DLOM Applies

DLOM typically applies to all private business valuations because they lack ready markets. It applies whether you’re valuing 100% of the business for sale purposes, a controlling interest for estate tax returns, or a minority interest. The specific DLOM percentage may vary—a controlling interest might have a smaller DLOM (because the buyer controls the sale process) than a minority interest (which might take longer to place)—but the principle applies broadly.

Calculating DLOM: Multiple Approaches

Restricted Stock Studies: The primary DLOM methodology uses restricted stock studies, which examine the value of restricted shares in public companies (shares that can’t be immediately sold) compared to freely tradable shares of the same company. The discount between the restricted and freely tradable share prices provides empirical evidence of what marketability is worth.

Studies by firms like Morningstar (which tracks SEC data on restricted stock transactions) consistently show discounts in the 20-40% range. Some studies show even higher discounts (35-55%) depending on the restrictions and time periods examined.

IPO Studies: Another approach analyzes IPO data, comparing valuations of private companies immediately before their IPO to their market values immediately after. The difference (often 30-50%) represents the value of marketability gained through going public. These studies support DLOM percentages in the 30-50% range for early-stage growth companies, though percentages vary based on the company stage and riskiness.

Bid-Ask Spreads and Transaction Costs: Some appraisers approach DLOM by analyzing transaction costs, including professional fees (legal, accounting, investment banking), time costs, and the bid-ask spread typical in private business sales. These direct costs often total 20-30% before factoring in buyer uncertainty and extended transaction timelines.

IRS Approach to DLOM

The IRS recognizes DLOM for private business valuations and accepts well-documented discounts in the 25-40% range for many businesses. However, the agency challenges aggressive DLOMs or those not supported by empirical data. Some recent court cases have questioned extraordinarily high DLOMs (50%+), particularly when combined with other discounts. The IRS also challenges DLOM when the same business has a ready buyer or if restricted agreements are in place that should be considered separately.

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Stacking Discounts and IRS Scrutiny

A critical issue in valuation practice is “discount stacking”—applying both DLOC and DLOM to the same valuation. In theory, if a business is worth $10 million, a 30% DLOC might apply to a minority interest, resulting in $7 million. Then if a 30% DLOM is also applied, the value becomes approximately $4.9 million—a combined discount of over 50%.

When Discounts Stack (and When They Don’t)

Discount stacking is often appropriate. A minority holder in a private company reasonably faces both lack of control (DLOC) and lack of marketability (DLOM). However, the IRS and courts scrutinize whether discounts have been properly isolated and whether their combination is reasonable.

In some situations, discounts shouldn’t stack. For example, if a buy-sell agreement restricts transfers and establishes a fixed price, that restriction might replace DLOM rather than stack with it. Similarly, if a minority interest holder has specific rights or put rights (the right to force the company to buy their shares), that might limit DLOM application.

Recent Court Challenges

High-profile court cases have questioned aggressive discount stacking, particularly in estate tax valuations. Courts have recognized that while both DLOC and DLOM can apply, the combined effect must be reasonable and well-documented. Appraisers who simply apply standard percentages without justifying the stacked result face credibility challenges.

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CVI’s Approach to DLOM and DLOC

At Corporate Valuations Inc., we carefully analyze whether DLOM, DLOC, or both apply to your specific valuation. We don’t automatically apply industry averages; instead, we document the specific circumstances affecting marketability and control for your business.

Fact-Specific Analysis

For DLOC, we examine your specific shareholder agreement, voting arrangements, and the controlling owner’s history of dividend distributions, management decisions, and treatment of minority owners. A minority holder in a business with a pattern of generous distributions faces lower DLOC than one where the controlling owner retains all earnings.

For DLOM, we analyze the specific business characteristics: How easily could this business be sold? Are there natural buyers in the industry? Does the business have unique customer relationships or employee dependencies that affect marketability? Are there contractual restrictions on transfers? These facts drive our DLOM determination.

Data-Driven Quantification

We ground our discount percentages in empirical research—restricted stock studies, IPO data, Mergerstat acquisition data—relevant to your specific business type and size. We adjust for your particular circumstances, explain our methodology in detail, and document everything thoroughly for IRS or courtroom presentation.

Discount Stacking Discipline

When both DLOC and DLOM apply, we carefully document how we’re combining them. We avoid mechanically multiplying percentages and instead explain the economic logic for stacking. We consider whether buy-sell agreements, put rights, or other factors should reduce or eliminate certain discounts. This disciplined approach ensures our valuations survive IRS and court scrutiny.

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Key Takeaways

DLOC (discount for lack of control) applies when valuing minority interests. Minority owners lack the power to direct management, declare dividends, or force sales, reducing their interest’s value by typically 20-40%.

DLOM (discount for lack of marketability) applies to illiquid private interests. Private business interests can’t be instantly sold like public stock, justifying discounts typically ranging from 25-50%.

Discounts are data-driven, not arbitrary. Restricted stock studies, IPO data, and Mergerstat acquisition data provide empirical support for discount percentages.

Discount stacking requires careful analysis. While both discounts can apply to a minority interest in a private company, their combination must be reasonable, documented, and defensible.

The IRS and courts scrutinize aggressive discounting. Poorly documented or oversized discounts face challenges in audits and litigation.

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