How Discounts for Lack of Control and Marketability Affect Business Value in Litigation

How DLOC DLOM Discounts in Litigation Affect Business Value

Executive Summary

DLOC DLOM discounts litigation — also referred to as DLOC DLOM discounts in litigation — discounts for lack of control (DLOC) and lack of marketability (DLOM) — can materially change a litigated business value—sometimes by hundreds of thousands (or millions) of dollars—because they address real economic limits on what an ownership interest can do and how quickly it can be converted to cash.

In litigation, the dispute is rarely whether discounts exist in theory. The dispute is whether they apply under the governing standard of value and, if they do apply, whether the specific percentages are supported by facts, documents, and accepted valuation methods. Attorneys need a business valuation expert witness expert who understands how to build and defend these analyses in court.

This guide explains what DLOC and DLOM are, when they arise in disputes, how valuation professionals typically quantify and apply them (including a simple numeric example), and the most common failure points that opposing experts target during depositions and at trial.

Definitions (Plain English)

Before diving into the litigation context, here is what these terms mean in practical terms:

DLOC — Discount for Lack of Control: A reduction applied to a minority ownership interest because that interest cannot unilaterally make key business decisions — such as setting executive compensation, declaring dividends, selling the company, or directing capital expenditures. The discount reflects what a hypothetical buyer would pay less for an interest that has no control over these decisions. DLOC is typically supported by studies of acquisition premiums paid to acquire control of companies.

DLOM — Discount for Lack of Marketability: A reduction that reflects the time, cost, and uncertainty of converting a closely held ownership interest into cash. Unlike publicly traded shares (which can be sold in seconds on an exchange), a minority interest in a private company has no ready market. A buyer must find a willing purchaser, negotiate terms, and potentially wait months or years. DLOM is typically supported by restricted stock studies, pre-IPO studies, and/or option-based quantitative models.

In litigation, the question is not whether these discounts exist in theory — they do. The question is whether they apply under the governing standard of value, and whether the specific percentage selected is defensible given the facts of the case.

When DLOC/DLOM Comes Up in Litigation

DLOC and DLOM disputes most often appear in business valuation litigation disputes when the interest being valued is a minority (non-controlling) stake in a closely held company, or when the interest is not readily sold on an established market. Common fact patterns include:

• Shareholder/partner buyouts and oppression claims

A minority owner argues for a higher value, while the opposing side argues for discounts tied to lack of voting power, limited transfer rights, or contractual restrictions in governing documents.

• Divorce and other family-law financial disputes

Whether discounts apply may turn on the jurisdiction’s valuation standard (often “fair value” versus “fair market value”), the purpose of the valuation, and whether the spouse is receiving the interest or a cash offset. Understanding the distinction between fair market value vs. investment value is critical in these cases. A qualified forensic accounting expert can evaluate which standard applies and how it affects the discount analysis.

• Estate, gift, and trust disputes

Valuations may involve minority interests, transfer restrictions, and marketability constraints. These cases commonly require clear support for discount assumptions and careful documentation.

• Insurance, damages, and commercial litigation

DLOC/DLOM can arise indirectly when a business value feeds an economic damages model (for example, in buyout calculations, diminution-in-value claims, or allocation disputes).

• Contract and buy-sell agreement enforcement

Agreements sometimes specify the applicable standard of value and whether discounts apply. Ambiguity often leads to competing interpretations and expert disagreements.

Accepted Methods / Frameworks

Conceptually, a business valuation often starts with an indicated value for the enterprise or equity (using an income, market, or asset approach). The valuation then considers whether the specific interest being valued is less valuable than a pro rata slice of the whole due to (1) lack of control and/or (2) lack of marketability.

These discounts are not “automatic.” They should be tied to the rights and restrictions of the subject interest, the standard of value, and the evidence available in the case record.

1) Discount for Lack of Control (DLOC)

DLOC reflects that a non-controlling owner typically cannot unilaterally direct key decisions—such as declaring distributions, hiring or removing management, approving budgets, setting compensation, selling assets, or initiating a sale of the company.

In practice, valuation professionals often support DLOC by analyzing control premiums and minority interest data observed in transactions, then adjusting those benchmarks to the subject company’s governance rights (voting thresholds, protective provisions, supermajority requirements, and any contractual “veto” rights). The guideline company method is one framework commonly used to develop control-level values from which DLOC is then derived.

In litigation, the strongest DLOC analyses do two things: (a) tie the discount to the actual powers the interest does (and does not) have, and (b) show that the discount is consistent with the valuation approach already used (so the discount does not double-count risks already embedded in cash flows or multiples).

2) Discount for Lack of Marketability (DLOM)

DLOM reflects that an interest in a closely held company usually cannot be sold quickly at low cost. There may be no ready market, transfers may require approvals, and any sale process may be slow, uncertain, and expensive.

Valuation professionals commonly support DLOM using a combination of empirical evidence and analytical models, selected to fit the facts of the case. Common categories include:

• Empirical benchmarks (restricted stock and pre-IPO data)

Studies comparing restricted shares to freely tradable shares, and private-company transactions prior to IPOs, are frequently used as empirical reference points—provided the analyst explains comparability and the limits of the underlying data.

• Option-based models

Some analysts estimate the “cost to insure” against illiquidity during a restricted holding period using option concepts (often presented in a simplified, litigation-friendly way).

• Company-specific models (e.g., QMDM-style frameworks)

Company-specific frameworks seek to connect marketability to expected distributions, growth, risk, and an assumed holding period. These models tend to be more defensible when their inputs are explicitly supported by the record (financials, forecasts, distribution history, restrictions, and financing terms).

3) Applying Discounts

DLOC and DLOM are typically applied sequentially rather than added together. The logic is that a marketability discount is applied to the value of the interest after accounting for its lack of control.

Sequential application also helps avoid simple arithmetic mistakes (for example, a 30% DLOC and 25% DLOM do not equal a 55% total discount).

Simple numeric example (sequential application)

Assume a company’s total equity value is $10,000,000 and a 10% interest is being valued. The pro rata value is $1,000,000.

Assume the valuation evidence supports a 30% DLOC and a 25% DLOM for this specific interest.

Step 1 — Apply DLOC: $1,000,000 × (1 − 0.30) = $700,000.

Step 2 — Apply DLOM: $700,000 × (1 − 0.25) = $525,000.

Result: The concluded value is $525,000, which represents an effective combined discount of 47.5% from the $1,000,000 pro rata value.

How Experts Support Discounts (Evidence Attorneys Should Request)

A defensible discount analysis is document-driven. Our expert witness team commonly requests the following materials in discovery:

• Entity governing documents: articles/charter, bylaws, operating agreement, partnership agreement, shareholder agreements, and amendments
• Capitalization table, unit/share classes, voting rights, and any side letters or transfer restriction agreements
• Buy-sell agreements (including valuation clauses, standards of value, and any discount language)
• Historical financial statements (monthly/quarterly if available) for at least 3–5 years
• General ledger detail (for quality-of-earnings style adjustments when relevant to valuation)
• Tax returns for the same period as financial statements
• Budgets, forecasts, and management projections used in the ordinary course of business (not litigation-created documents)
• Distribution/dividend history, owner draws, and any constraints on distributions (debt covenants, regulatory limits, working capital needs)
• Debt agreements, loan covenants, and lender communications affecting liquidity, distributions, and transferability
• Management compensation policies, related-party transactions, and any non-recurring items tied to control rights
• Any prior sales of interests, redemptions, or offers to buy/sell (including rejected offers and term sheets)
• Evidence of marketing efforts (if any) to sell the company or interests, and the timeline/cost of those efforts
• Board/manager meeting minutes or consents addressing major decisions (distributions, acquisitions, compensation, financing, asset sales)
• Industry and market data used for valuation multiples, control premiums, and comparability analyses (with clear selection rationale)

Common Attorney Pitfalls

In litigation, discount disputes often hinge on a small number of recurring technical errors. Below are common pitfalls and practical rebuttal angles:

• Using “standard” discount percentages without tying them to the subject interest

Rebuttal strategy: force the analysis back to the governing documents, actual voting rights, transfer restrictions, distribution history, and holding-period assumptions. Ask where each input appears in the record.

• Double-counting risk or illiquidity

Rebuttal strategy: map where risk has already been captured (cash-flow adjustments, discount rate, capitalization rate, or multiples). If the valuation approach already embeds private-company risk and liquidity constraints, the discount must be justified as incremental—not duplicative.

• Ignoring the standard of value and the purpose of the valuation

Rebuttal strategy: identify whether the case calls for fair market value, fair value, investment value, or a contract-defined standard. Then test whether the opposing discount assumptions are consistent with that standard (some standards limit or exclude certain discounts).

• Misapplying DLOM to controlling interests (or assuming it can never apply)

Rebuttal strategy: focus on the actual exit path. Even a controlling interest can be hard to sell if the company is small, highly leveraged, or subject to strong transfer constraints. Conversely, if a credible near-term sale/recapitalization path exists, a large DLOM may be difficult to defend.

• Adding discounts instead of applying them sequentially

Rebuttal strategy: walk the trier of fact through simple arithmetic. Sequential application is the typical framework; an “added” approach often overstates the total discount.

• Using empirical studies as a shortcut rather than as support

Rebuttal strategy: challenge comparability (industry, size, profitability, restrictions, holding periods, market conditions). Empirical benchmarks can support an analysis, but they rarely substitute for a company-specific explanation.

• Failure to document assumptions and inputs

Rebuttal strategy: request the underlying workpapers, data extracts, and model inputs. Unsupported inputs (holding period, volatility proxies, distribution timing) are often the easiest attack points in deposition.

How a CPA Expert Witness Defends These Discounts Under Scrutiny

In contested litigation, opposing counsel will challenge every aspect of a DLOC/DLOM analysis. A defensible expert witness must be prepared to withstand cross-examination and, increasingly, pre-trial Daubert (or Frye) challenges to the methodology itself.

Methodology is document-driven, not opinion-driven. A credible CPA expert ties every discount input to a specific document in the record — operating agreement transfer restrictions, buy-sell provisions, distribution history, capitalization table. Opinions untethered to case-specific facts are vulnerable to exclusion.

Empirical support must be comparable, not just available. Citing a restricted stock study or pre-IPO dataset is not enough. The expert must explain why the benchmark companies are comparable to the subject interest in terms of size, industry, restriction period, and liquidity profile. Failure to address comparability is one of the most common lines of attack.

Double-counting is explicitly addressed. Where the income approach or discount rate already embeds illiquidity risk, the expert must demonstrate that the DLOM captures an incremental, non-overlapping reduction. Courts and opposing experts will look for overlap between the discount rate and the DLOM.

The applicable standard of value controls. “Fair value” (used in many state-law dissenter’s rights and shareholder oppression cases) often excludes or limits minority and marketability discounts. A Daubert-ready expert identifies the controlling standard early and confirms the discount framework is consistent with it.

Sequential application, not addition. DLOC and DLOM are typically applied sequentially (not added) to a marketable, minority-level value. The expert should walk the court through the arithmetic step by step and demonstrate that the total reduction is not the result of stacking unrelated adjustments.

Attorneys evaluating expert readiness should ask: Can this expert explain the basis for every input in plain language? Can they withstand a Daubert motion on methodology? Have they testified in similar cases? Joey Friedman CPA PA provides expert witness testimony and forensic accounting support on DLOC/DLOM discount issues in Florida and federal courts nationwide.

FAQ

What is DLOC vs DLOM in litigation valuations?

DLOC (Discount for Lack of Control) reflects the reduced value of an ownership interest that cannot control key business decisions such as distributions, management, or a company sale. DLOM (Discount for Lack of Marketability) reflects the time, cost, and uncertainty of converting a closely held ownership interest into cash. In litigation, both are analyzed based on case-specific facts, governing documents, and the applicable standard of value.

When are DLOC DLOM discounts rejected or limited by courts?

Courts most frequently reject or limit DLOC and DLOM discounts when: (1) the applicable standard of value is “fair value” (used in many shareholder oppression and dissenter’s rights cases), which often excludes minority and marketability discounts; (2) the discounts double-count risks already captured in the cash flows or discount rate; or (3) the analyst cannot tie the specific discount percentage to the subject company’s actual restrictions and rights.

What data supports DLOM — restricted stock studies, pre-IPO studies — and how are they attacked?

DLOM is commonly supported by restricted stock studies (comparing the price of registered vs. restricted shares of the same company) and pre-IPO studies (comparing private transaction prices to subsequent IPO prices). Opposing experts attack these by challenging comparability: the benchmark companies may differ in size, industry, profitability, restriction period, and market conditions. The strongest DLOM analyses triangulate across multiple methods and explain why each data source is comparable to the subject interest.

How do experts justify discount selection through range and triangulation?

Rather than selecting a single data point, defensible experts present a range of indicated discounts from multiple sources (empirical studies, option-based models, company-specific frameworks), then explain why the concluded discount falls within that range based on the subject company’s specific characteristics. This “triangulation” approach is harder to attack because it does not rely on any single study or model that can be singled out for comparability problems.

What are the common rebuttals to “double counting” in DLOC DLOM analyses?

Double counting occurs when risk already embedded in the income or market approach (through adjusted cash flows, a higher discount rate, or lower multiples) is then applied again as a separate discount. Rebuttals focus on mapping exactly where each risk factor was captured in the valuation model. If private-company illiquidity was already reflected in a higher discount rate, a separate DLOM must be justified as capturing incremental, non-overlapping risk.

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Disclaimer: This article is for informational purposes only and does not constitute legal advice. Outcomes depend on specific facts and circumstances.