Do courts apply a private company discount or a marketability discount?

Abstract

The value of an unlisted entity remains a contentious issue. This is notably because there is no consensus on the nature, size, and drivers of the so-called discount for lack of marketability (“DLOM”). The DLOM is the estimated percentage difference in value between an unlisted and an all-else-equal listed company. The traditional methods for estimating the DLOM are essentially based on financial and transactional data. It is notoriously difficult to obtain information about the internal organization of private companies and this explains why the knowledge of the DLOM determinants remains limited. These limitations have led us to consider an alternative data source. Specifically, we have based our research on a unique dataset of U.S. court decisions that apply a DLOM to a private company and justify the percentage discount by reference to the specifics of the valuation subject. This article shows that courts apply different discount percentages depending on whether they value operating or non operating companies. The difference between the DLOM applied on operating companies and the DLOM applied on non-operating companies is 7 percent. This paper explains the difference by distinguishing between a private company discount and a marketability discount.