Quick answer: Two discounts can sharply lower the value of a business interest: a discount for lack of marketability (DLOM) — because a private company can’t be sold quickly or cheaply like public stock — and a discount for lack of control — because a minority interest can’t direct distributions, a sale, or management. Whether either applies in a Florida divorce is contested and fact-dependent, and it turns largely on the standard of value the court uses: applying a discount that isn’t warranted understates the marital estate, while ignoring one that is warranted overstates it. My role is to support and quantify a defensible discount (and to present the value with and without it); the court decides whether it applies.
This is a spoke of the hub on business valuation in a Florida divorce, closely tied to valuation date & standard of value.
What the two discounts are
- Discount for lack of marketability (DLOM). A share of a public company can be sold in seconds at a known price. An interest in a closely-held business cannot — finding a buyer is slow, costly, and uncertain. A DLOM reduces value to reflect that illiquidity.
- Discount for lack of control (minority discount). An owner who cannot control the company — can’t set compensation, force a distribution, or compel a sale — holds something worth less, dollar for dollar, than a controlling stake. This discount reflects that powerlessness.
The two are distinct: one is about selling, the other about control. An interest can warrant one, both, or neither.
When they apply — and when they don’t
This is the contested part, and it ties directly to the standard of value:
- Under fair market value (what a hypothetical buyer would pay), illiquidity and lack of control are real to that buyer, so discounts can be appropriate — especially for a genuine minority interest.
- Under a “value to the holder” view (the owner is keeping the business, not selling), a marketability discount may be inappropriate, because there is no sale to discount for.
- Control matters. A spouse who owns 100% of the company has no lack-of-control discount; a spouse who owns a true minority stake may. The facts decide.
Because the same business interest can be worth materially more or less depending on these calls, I do not bake a discount in (or leave it out) silently. I calculate the value with and without supportable discounts and disclose the basis, so the court can rule on a clear record.
How a CPA supports and sizes a marketability discount
A discount that is merely asserted will not survive cross-examination. The recognized framework for sizing a DLOM comes from Mandelbaum v. Commissioner, T.C. Memo 1995-255 (1995) — a federal Tax Court decision that set out the factors an analyst weighs. (It is a valuation framework for how large a marketability discount should be; it is not Florida authority on whether a discount applies in a divorce — that remains the standard-of-value question above.) The Mandelbaum factors include:
- the company’s financial statement analysis (earnings, revenues, and key ratios);
- its dividend or distribution policy;
- the nature of the company — its history, position in the industry, and economic outlook;
- the company’s management;
- the degree of control (or lack of it) in the transferred interest;
- restrictions on transferability of the interest;
- the likely holding period for the interest;
- the company’s redemption policy; and
- the costs associated with a public offering.
Alongside these factors, analysts draw on empirical evidence (such as restricted-stock and pre-IPO studies) to bracket a supportable range. I document which factors and data drove the number, rather than asserting a percentage.
A distinction that matters: divorce is not a §607 buyout
In a Florida shareholder buyout or oppression case under the business-corporations statute, the standard is statutory “fair value,” and marketability or minority discounts are frequently not applied. A divorce valuation is a different context with a different standard — so a discount that would be excluded in a §607 fair-value case may be a live issue in a divorce, and vice versa. Conflating the two is a common error. (For that separate corporate context, see the shareholder fair-value framework.)
A worked example
Illustrative example (hypothetical, no client data): A spouse owns a 30% interest in a company whose whole-business, control-basis value is $3,000,000, so the pro-rata share is $900,000. If the facts support a 15% lack-of-control discount and a 25% marketability discount, the interest could be valued near $573,750 ($900,000 × 0.85 × 0.75) — roughly $326,000 below the pro-rata figure. But if the court applies a value-to-the-holder standard, or finds the interest effectively controlling, those discounts may not apply and the value stays close to $900,000. Each discount has to be independently supported, and whether they apply at all is the court’s call — which is exactly why I present the interest both ways.
If you are an attorney handling a Florida divorce involving a minority or hard-to-sell business interest, Joey Friedman, CPA, P.A. prepares supported discount analyses and presents the value with and without them, statewide.
Related resources
- Hub: How a Forensic CPA Values a Business in a Florida Divorce
- How DLOC & DLOM Discounts Affect Business Value (litigation context)
- Shareholder Buyout: Florida Statutory Fair-Value Framework
Frequently asked questions
What is a discount for lack of marketability (DLOM)?
It reduces the value of a closely-held business interest to reflect that, unlike public stock, it cannot be sold quickly or cheaply. The size of the discount is supported by a factor analysis and market evidence, not asserted.
Do minority and marketability discounts apply in a Florida divorce?
It depends and it is contested. The answer turns largely on the standard of value the court uses and whether the interest is controlling. Applying an unwarranted discount understates the estate; ignoring a warranted one overstates it — so the value should be presented both ways.
What are the Mandelbaum factors?
They are the factors a Tax Court used in Mandelbaum v. Commissioner (1995) to size a marketability discount — including the company’s financials, distribution policy, management, transfer restrictions, holding period, redemption policy, and the cost of going public. They guide how large a DLOM should be.
Are discounts treated the same as in a shareholder buyout?
No. A Florida shareholder buyout or oppression case applies a statutory “fair value” standard under which discounts are often not applied. A divorce uses a different standard, so the discount question can come out differently; the two should not be conflated.
By Joey N. Friedman, CPA, ABV, M.Acc, MIB — President, Joey Friedman, CPA, P.A.