How do DLOC and DLOM work in private company valuation, and can you apply both discounts simultaneously?

DLOC and DLOM are two of the most tested concepts in the CFA Level II private company valuation reading. They address fundamentally different risks, and yes, they can be stacked -- but you need to understand the logic.

Definitions

• DLOC (Discount for Lack of Control): Applied when valuing a minority interest in a private company. A minority shareholder can't force dividends, change management, or sell the company. This lack of control reduces the value relative to a controlling interest.

• DLOM (Discount for Lack of Marketability): Applied because private shares can't be easily sold on a public exchange. Even a controlling owner of a private company faces illiquidity -- finding a buyer takes time, legal costs, and due diligence.

When to Apply Each Discount

Worked Example: Bellingham Precision Machining (fictional)

You're valuing a 15% minority stake using acquisition transaction multiples.

Since transaction comps reflect a controlling, marketable value and you need a minority, non-marketable value:

Step 1: Apply DLOC

Minority marketable value = $120M x (1 - 0.25) = $90M

Step 2: Apply DLOM

Minority non-marketable value = $90M x (1 - 0.20) = $72M

15% stake value = $72M x 0.15 = $10.8M

Important: The discounts are multiplicative, not additive.

Total effective discount = 1 - (1 - 0.25)(1 - 0.20) = 1 - 0.60 = 40%, not 45%.

How Are These Discounts Estimated?

DLOC is often derived from the control premium: DLOC = 1 - 1/(1 + CP). If the average control premium in the industry is 30%, then DLOC = 1 - 1/1.30 = 23.1%.

Exam Trap: If the question uses public company comparables (already minority basis), you do NOT apply DLOC again. You only apply DLOM. Applying DLOC to a value that's already on a minority basis would double-discount for control.

Explore more private valuation topics in our CFA Level II materials.