What Is Discount for Lack of Marketability (DLOM)?Definition and Examples

The marketability discount is a critical factor in estate planning for business owners. When transferring business interests to family members, the IRS allows a DLOM to reduce the taxable value of the gift or inheritance. A business with an enterprise value of $3,000,000 where a 25% DLOM is applied to a gifted minority interest can significantly reduce estate taxes. However, the IRS closely scrutinizes DLOM claims, and overly aggressive discounts invite audit adjustments and penalties. Working with qualified appraisers who can support the discount with empirical data is essential.

In divorce proceedings, the marketability discount is often heavily contested. The business-owning spouse argues for a large DLOM to reduce the marital estate value, while the non-owning spouse argues against it or for a minimal discount. Courts examine whether a sale is reasonably foreseeable, whether the business is highly profitable (which increases marketability), and whether the interest being valued could attract buyers despite its illiquidity. Judicial outcomes vary widely, making expert testimony critical in these disputes.

For business owners considering selling a partial interest to an outside investor, the DLOM directly affects the negotiation. An investor acquiring a 30% non-controlling interest in a private company will demand a meaningful discount from proportional value because they cannot easily sell that interest if they need liquidity. Understanding that a 25% DLOM is typical helps both parties set realistic expectations for the investment terms and prevents negotiations from derailing over the price difference between proportional value and the discount-adjusted transaction price.