Discounts For Lack Of Marketability - DLOM

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Definition: Discounts For Lack Of Marketability - DLOM

A fixed amount or percentage is deducted from the selling price of a block of shares because they cannot be easily resold. This is widely done in private companies.

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.

Hence, this concludes the definition of Discounts For Lack Of Marketability - DLOM along with its overview.

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