What discounts apply when valuing a private company, and how do you estimate DLOC and DLOM?

When valuing private companies, you must adjust for the fact that private ownership stakes lack the liquidity and control features of publicly traded shares. Two key discounts apply.

Discount for Lack of Control (DLOC)

Applied when valuing a minority interest in a private company. A minority shareholder cannot:

• Set dividend policy
• Hire/fire management
• Approve mergers or asset sales
• Determine capital allocation

Because controlling interests trade at a premium in public markets (the "control premium" averages 20-40%), minority interests in private companies are discounted.

DLOC = 1 - [1 / (1 + Control Premium)]

Example: If the average control premium in comparable transactions is 30%:

DLOC = 1 - [1 / 1.30] = 1 - 0.7692 = 23.08%

Discount for Lack of Marketability (DLOM)

Applied to account for the inability to quickly sell a private company stake at fair value. Unlike public shares with instant liquidity, selling a private interest can take 6-18 months, require expensive due diligence, and involve significant transaction costs.

DLOM is typically estimated from:

1. Restricted stock studies: Compare prices of restricted (unregistered) public shares to freely tradable shares. Historical discount: 15-35%.
2. Pre-IPO studies: Compare private transaction prices to subsequent IPO prices. Historical discount: 25-50%.
3. Option-based models: A put option with the estimated time-to-sale as expiration provides a marketability discount estimate.

Example: Winslow Technologies is a private company valued at $24 million using public comparable multiples. You're valuing a 15% minority interest.

Step 1 — Pro rata value: 15% x $24M = $3.6M

Step 2 — Apply DLOC (23%): $3.6M x (1 - 0.23) = $2.772M

Step 3 — Apply DLOM (25%): $2.772M x (1 - 0.25) = $2.079M

The minority, non-marketable interest is worth $2.079 million — a combined 42.25% discount from the pro rata value.

Can They Be Stacked? Yes.

DLOC and DLOM address different risk factors and are applied multiplicatively:

Adjusted Value = Pro Rata Value x (1 - DLOC) x (1 - DLOM)

When Discounts Do NOT Apply:

• Controlling interest in a private company: No DLOC (already has control)
• Using guideline transaction method where transactions already reflect minority pricing: DLOC may already be embedded
• Company with imminent IPO or strategic buyer: DLOM is minimal

Exam Tip: Watch for questions that give you a value derived from public market multiples (already at a controlling, marketable level) and ask you to value a minority, non-marketable stake. Apply DLOC first, then DLOM.

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