How Discounts for Lack of Control and Marketability Affect Business Value in Litigation
Executive Summary
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.
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.
When This Issue Arises
DLOC and DLOM disputes most often appear 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.
- 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 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).
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.
Documents & Data Checklist
A defensible discount analysis is document-driven. The following materials are commonly requested in discovery and are frequently referenced in expert testimony:
- 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 Pitfalls + Rebuttal Strategies
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.
FAQ
What is a discount for lack of control (DLOC)?
DLOC is a downward adjustment that reflects the reduced economic value of an ownership interest that cannot control key decisions such as distributions, management changes, budgets, financing, or a sale of the company.
What is a discount for lack of marketability (DLOM)?
DLOM is a downward adjustment that reflects the time, cost, and uncertainty of converting an ownership interest in a closely held company into cash when there is no ready market and transfers may be restricted.
How are DLOC and DLOM typically applied in a valuation?
They are typically applied sequentially: DLOC first (to reflect lack of control), then DLOM (to reflect lack of marketability). Adding the percentages together can materially overstate the total discount.
Do DLOC and DLOM always apply in litigation valuations?
No. Whether they apply depends on the governing standard of value, the rights and restrictions of the subject interest, and the purpose of the valuation (for example, certain “fair value” contexts may limit or exclude discounts).
Can a marketability discount apply to a controlling interest?
Sometimes. Control may address decision-making power, but it does not automatically create a ready market. The defensibility of a DLOM for a controlling interest depends on the expected exit path, restrictions, and company-specific liquidity factors.
What evidence is most persuasive when defending (or attacking) discounts in court?
The most persuasive support ties discount assumptions to the case record: governing documents, actual distribution history, documented restrictions, credible holding-period assumptions, and transparent calculations that avoid double-counting.
Sources
Contact the team at Joey Friedman CPA PA to discuss your business valuation discount needs.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Outcomes depend on specific facts and circumstances.
