Understanding DLOC & DLOM in Private Company Valuation

When valuing ownership interests in a privately held business, analysts often begin with an equity value that reflects what the entire company is worth on a controlling, marketable basis. This represents the value of a hypothetical buyer acquiring full authority over the business and having immediate liquidity, conditions that rarely match the realities of minority ownership.

Most real-world ownership interests do not come with the ability to direct the company’s strategy, control distributions, or force a sale. And unlike public-company shares, minority interests in private companies cannot be readily sold or easily converted into cash. Investors recognize these disadvantages, and the valuation framework must reflect them.

Two well-established adjustments help bridge the gap between theoretical value and actual ownership economics: the Discount for Lack of Control (DLOC) and the Discount for Lack of Marketability (DLOM). While often applied together, they address different constraints and serve distinct purposes within the valuation process.

The Discount for Lack of Control (DLOC)

Adjusting value to reflect the absence of governing power.

A non-controlling interest lacks meaningful influence over the company’s direction. This includes the inability to:

• Elect or replace management
• Approve or modify distribution policies
• Initiate or block a sale of the business
• Direct capital allocation or major strategic decisions
• Influence financing decisions, such as taking on or repaying debt

Control is inherently valuable because it directly affects a company’s ability to generate returns and manage risk. The absence of control therefore reduces the economic value of a minority interest compared to an equivalent share of a controlling position.

DLOC quantifies this reduction.

In practice, DLOC is often estimated using control premium studies, which measure how much buyers are willing to pay above market price to acquire control of public companies. By converting these premiums into their inverse, analysts estimate the relative value discount associated with not having control.

Typical DLOCs range from 10% to 30%, but the appropriate discount depends on factors such as:

• Voting rights attached to the interest
• Provisions in shareholder or operating agreements
• Board composition and seat allocation
• Protective rights or veto powers
• The actual influence (if any) afforded to minority holders

A minority interest with no meaningful rights will command a much larger discount than one with partial or protective governance mechanisms.

The Discount for Lack of Marketability (DLOM)

Capturing the economic cost of being unable to quickly convert ownership into cash.

Even after accounting for control, minority interests in private companies remain highly illiquid. Unlike publicly traded shares, there is:

• No active market
• No automatic pool of buyers
• No transparent pricing mechanism
• Often, contractual or legal restrictions on transferability

Because investors may need to hold the interest for an extended period, or may be unable to sell at all, they require compensation for this illiquidity. That compensation is reflected in the DLOM.

DLOM is supported by multiple empirical sources, including:

• Restricted Stock Studies, which compare prices of restricted shares to freely traded shares of the same company
• Pre-IPO Studies, which compare private transaction prices to later public market prices
• Option-based models, which evaluate the benefit lost when an investor cannot sell an asset freely

Across these models and datasets, DLOMs most commonly fall in the 15–35% range. However, the appropriate discount may be higher or lower depending on:

• Expected time to liquidity (near-term exit vs. indefinite holding)
• Company financial strength, volatility, and risk profile
• Degree of transfer restrictions in governing documents
• Size of the interest and likelihood of finding a buyer
• Market conditions and investor sentiment

In short, the harder it is to exit, and the less predictable that exit is, the greater the discount required to reflect marketability risk.

How These Discounts Work Together

While related, DLOC and DLOM are designed to address distinct valuation challenges.

• DLOC adjusts for lack of control over the business.
• DLOM adjusts for lack of liquidity and resale ability.

Because these issues are separate, the discounts are applied multiplicatively, not additively. Doing so ensures each discount impacts value without overstating or understating the combined effect.

The resulting valuation moves from a control, marketable level of value to a minority, non-marketable level of value, which more closely approximates what an informed buyer would pay under real-world conditions.

Why These Adjustments Matter

In private company valuation, it is easy to overstate the value of a minority interest if one only considers the company’s overall equity value. DLOC and DLOM ensure the analysis reflects what the owner actually has, not the theoretical value of the entire business.

These adjustments provide a more accurate picture of:

• The owner’s actual economic rights
• The risks associated with holding the interest
• The limitations on liquidity and exit opportunities
• The realistic price a market participant would pay

Whether used for transaction planning, partner buyouts, estate and gift tax reporting, shareholder disputes, or financial reporting, DLOC and DLOM help produce valuations that align with market behavior and withstand external scrutiny.

Ultimately, these adjustments allow analysts, business owners, and advisors to bridge the gap between enterprise-level value and interest-level value, ensuring that valuation conclusions are grounded in the practical realities of private company ownership.

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