What Is a Discount for Lack of Marketability (DLOM)? How It Works

In valuation, marketability means “the ability to quickly convert property to cash at minimal cost.” Take two identical holdings. Buyers pay more for the one they can sell fastest without losing value. A private sale can take months, and the price can move in that time. A buyer wants to be paid for that risk. The discount for lack of marketability is that payment, expressed as a percentage.

The discount comes in at a specific step. The appraiser first reaches a value on a marketable basis, for example from comparable listed companies or from a recent funding round. If that value already reflects illiquidity, no DLOM is due. Any discount for lack of control (DLOC) comes first. It prices a minority holder’s inability to direct the company. The IRS job aid says DLOM should then be set on its own factors and kept separate from other discounts.

Marketability and liquidity are related, but they differ. A share with no market is illiquid. An illiquid share may still be sold, only slowly or at a loss. Some methods price a separate discount for lack of liquidity, and a report should say which one it measures.

409A valuations

The regulation lists “discounts for lack of marketability” among the factors of a reasonable method. The appraiser first splits value across the share classes. Then the appraiser discounts common stock for the years until an exit. See 409A valuation.

Estate and gift tax

Fair market value is the price a willing buyer and a willing seller would agree on, with neither forced to deal. A gifted or inherited private stake is valued as if sold to that hypothetical buyer. That buyer would demand a discount. This is where most DLOM disputes with the IRS arise.

Financial reporting

Funds and companies that report private holdings at fair value face the same question. What would a market participant pay for a holding it cannot sell freely?

Secondary pricing

No appraiser signs off here. Still, a buyer who pays less for private common stock than the last round’s preferred price is applying the same logic. See secondary transaction.

No method is required. In 2009, the IRS wrote a job aid for its own valuation staff that reviews the main families of methods. The job aid says it is not an official position and sets no fixed cutoffs. These are the methods you are most likely to meet:

The option models share one idea. An investor who could sell freely would not need insurance against a falling price while the holding is locked in. So the cost of that insurance approximates the discount. Two inputs matter most: the expected time until the holding can be sold, and the volatility of the business, meaning how much its value swings. Both are estimates. That is why two credible reports on the same holding can differ materially.

An appraiser has split a company’s equity across its share classes and reached $20.00 per common share on a marketable basis. Common stock cannot be sold until a sale of the company or an IPO. The appraiser prices a protective put: an option to sell at $20.00, valued with the Black-Scholes model at a 4% risk-free rate. The discount then depends on two judgments: how long until the shares can be sold, and how volatile the business is.

Two changes show how sensitive the result is:

• Exit in three years instead of one$15.76 → $13.60 per share, −14%
• Volatility of 40% instead of 60%, at two years$14.42 → $16.44 per share, +14%

An appraiser would then check the result against benchmark studies and the facts of the company. An IPO filing shortens the expected term. A history of blocked transfers lengthens it.

• Quoting a study average as the answerThe IRS expects the analyst to look behind the data. A summary statistic on its own does not support a discount.
• Discounting twiceIf the marketable value already reflects illiquidity, a further DLOM double-counts.
• Blending DLOM and DLOCThey measure different things and are applied one after the other.
• Ignoring the expected exitA company that has filed for an IPO deserves a shorter term than one with no plan.
• Reading a 409A discount as a market priceIt is a tax valuation of common stock. A secondary buyer may pay a different price.

Marketability

The ability to convert an interest to cash quickly at minimal cost.

DLOM

The percentage deducted from a marketable value because the interest cannot be sold readily.

DLOC

Discount for lack of control: a deduction for a minority holder’s inability to direct the company, applied before DLOM.

Discount for lack of liquidity

A discount some methods price separately, for a holding that can be sold only slowly or at a loss.

Restricted stock

Unregistered shares of a listed company that cannot be resold until a Rule 144 holding period passes.

Protective put

An option to sell at a set price. Its cost is used as a proxy for the marketability discount.

Volatility

How much a value swings over time. In the option models, higher volatility means a larger discount.

409A valuation

The appraisal of a private company’s common stock used to set option strike prices.

Why common stock is valued below preferred before any discount is covered in common stock vs preferred stock. Other sources of private prices are covered in where valuations come from.

Figures and rules were last checked on October 2, 2026. Study averages are quoted from the IRS DLOM job aid of September 25, 2009. It is reference material and does not state an IRS position. The worked example is our own illustrative calculation.