Marketability can be loosely defined as the ease of conversion of shares into quick cash (ease of liquidation of shares) with a high degree of certainty and with minimum transaction and administrative costs.
Marketability of privately held shares is poorer than that of publicly traded shares due to various reasons including non-existence of market for such shares, difficulty in valuation and differential rights attached to certain shares.
The theory behind DLOM is that a discount exists between the value of a company's common stock that is marketable and the restricted stock that is not marketable.
The 3 most commonly used methods used to quantify DLOM include the restricted stock method, IPO method and the option pricing method.
Restricted stock method: The restricted stock method calculates the difference between a company's common stock and its restricted stock, which gives the discount due to the lack of marketability of the restricted stock.
IPO method: The IPO method measures the price difference between shares that are sold pre-IPO and post-IPO to evaluate DLOM.
Option pricing method: Under the option pricing method, DLOM is the option price as a percentage of the strike price.