What do discounts for lack of marketing mean?
Lack of market value discounts (DLOM) refer to the method used to help calculate the value of shares held and restricted. The theory behind DLOM is that there is a valuation discount between a publicly traded stock and therefore has a market, and the private equity market, which often has little or no market place.
Various methods have been used to quantify the discount that can be applied, including the restricted stock method, the IPO method and the option pricing method.
Understanding Discounts for Lack of Marketing (DLOM)
The restricted stock method claims that the only difference between a company’s common shares and its restricted shares is the lack of market value of the restricted shares.
Thereafter, the price difference between the two units should arise due to this lack of marketing. The IPO method relates to the price difference between shares that are sold before the IPO and after the IPO. The percentage difference between the two prices is considered the DLOM using this method. The option pricing method uses the option price and the exercise price of the option as determinants of the DLOM. The option price as a percentage of the exercise price is considered to be the DLOM according to this method.
The consensus of many studies suggests that the DLOM is between 30% and 50%.
Discounts for lack of marketing challenges
Uncontrollable and non-marketable interests in limited companies pose unique challenges to valuation analysts. These problems often arise in connection with gift tax, inheritance tax, tax on transfers without generation, income tax, property tax and other tax disputes. To help assessors in the field, the Internal Revenue Service (IRS) offers advice, particularly around two related questions that deepen cloud analysis: Discount for Lack of Liquidity (DLOL) and Discount for Lack of Control ( DLOC).
Undoubtedly, the sale of a stake in a private company is a more expensive, uncertain and time consuming process than the liquidation of a position in a listed entity. An investment in which the owner can obtain cash in a timely manner is worth more than an investment in which the owner cannot sell the investment quickly. As such, private companies are expected to sell at a discount to their real intrinsic value due to additional costs, increased uncertainty and longer horizons associated with the sale of unconventional securities.