Discounts For Lack Of Marketability (DLOM): Role in Valuation

A discount for lack of marketability (DLOM) is a reduction in the value of an asset that is not publicly traded because it is not as easy to sell as a publicly traded asset. This can be due to a number of factors, such as the size of the company, the industry it is in, or the lack of a ready buyer.

DLOM is important to consider when valuing private companies or illiquid assets because it can significantly affect the price that an investor is willing to pay. For example, a private company that is not publicly traded may have a DLOM of 20%, while a publicly traded company may have a DLOM of only 5%. This is because it is more difficult to sell a private company than it is to sell a publicly traded company.

There are a number of different methods that can be used to estimate DLOM. One common method is the build-up method, which involves adding a number of premiums and discounts to the asset's intrinsic value. Another common method is the market approach, which involves comparing the asset to similar assets that have been sold in the market.

DLOM is an important concept to understand for anyone who is involved in valuing private companies or illiquid assets. By understanding DLOM, investors can make more informed decisions about the price they are willing to pay for an asset.

In addition to the factors mentioned above, there are a number of other factors that can affect the size of DLOM. These factors include:

* The size of the block of shares being sold.
* The liquidity of the market for the asset.
* The level of uncertainty about the future value of the asset.
* The level of risk associated with the asset.

The size of the block of shares being sold can affect DLOM because it is more difficult to sell a large block of shares than it is to sell a small block. This is because there are fewer buyers for a large block of shares, and it can take longer to find a buyer who is willing to pay the full price.

The liquidity of the market for the asset can also affect DLOM. A more liquid market means that it is easier to sell the asset, which will result in a lower DLOM. A less liquid market means that it is more difficult to sell the asset, which will result in a higher DLOM.

The level of uncertainty about the future value of the asset can also affect DLOM. If there is a lot of uncertainty about the future value of the asset, investors will be less willing to pay a high price for it. This will result in a higher DLOM.

The level of risk associated with the asset can also affect DLOM. A riskier asset will have a higher DLOM because investors will require a higher return to compensate for the risk.

DLOM is an important concept to understand for anyone who is involved in valuing private companies or illiquid assets. By understanding DLOM, investors can make more informed decisions about the price they are willing to pay for an asset.