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For What It’s Worth: Discounts for Lack of Marketability – February 2015

If you own shares of a publicly traded stock like General Electric, you can sell them almost instantly at low cost and receive your money in three days. GE stock is thus fully liquid. Just about every other asset you can think of – houses, cars, and private equity, for example – is illiquid, because it cannot be sold cheaply and quickly and converted to cash. Illiquidity is reflected in a value reduction called the discount for lack of marketability.

In business valuation, minority interests in private equity that are unprotected by buy-sell mechanisms bear a discount for lack of marketability, and the discount is strongly supported by empirical data and financial theory.  Such discounts can easily exceed 30% of the “as if fully liquid” value.

There is a long-running controversy about the existence and magnitude of discounts for lack of marketability for control (including 100%) private equity interests.  Most appraisers believe that they exist, but no empirical data exists to measure them. This leaves us in a theoretically gray area about which reasonable men and women legitimately disagree.

I believe that such discounts exist, but that they are less than those for minority interests. Here’s why:

  1. We all know that most private businesses up for sale do not actually sell, and those deals that close take many months. The uncertainty and the delay create the discount for lack of marketability. This is similar to the “blockage discount” which arises when one tries to sell a large block of publicly traded common stock in a thin market; the price goes down.
  2.   The cost of the sale is not part of the discount for lack of marketability.  This is a matter of definition, not economic reality.  Of course, there are real costs of selling (just as with houses and cars – commissions, appraisals, etc.) but we define the price (and the value) to exclude them.  We draw a somewhat arguable distinction between the cost of creating a market (finding a buyer), which contributes to lack of marketability, and the cost of selling (closing the deal).

Facts and circumstances clearly affect the discount for lack of marketability of a control interest. For example, a business that generates and distributes excess cash flow as dividends will be more attractive and liquid than one that does not, and will have less of a discount for lack of marketability. Nevertheless, it will still have one, because of reason #1 above.

Valuations play a part in all tax, transaction, and litigation matters. For additional information or advice on a current one, please do not hesitate to call.

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About Western Reserve Valuation Services LLC
Western Reserve Valuation Services LLC, based in Columbus, Ohio, is a leading provider of valuation services and financial opinions relating to corporate finance transactions, corporate tax planning and compliance, succession planning and wealth preservation, employee stock ownership plans (“ESOPs”), financial reporting and portfolio / fund valuations.  For more information, visit or call (614) 448-3700.

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