Valuation discount
Also: valuation discount, lack of marketability discount, lack of control discount, minority discount, DLOM
A reduction in the appraised value of an interest that cannot be freely sold or does not control the underlying entity. Common in estate and gift valuations of private business and partnership interests.
Valuation discounts reduce the price a willing buyer would pay for an interest in a private entity. The two most common are the Discount for Lack of Marketability (DLOM), reflecting the inability to sell quickly, and the Discount for Lack of Control (DLOC), reflecting the inability to dictate distributions or strategy. DLOM typically runs 15% to 30% for private company interests, driven by studies of restricted stock and pre-IPO transactions. DLOC adds another 15% to 25%. Discounts compound; a 25% DLOM and 20% DLOC produce a combined 40% discount.
Example: a parent appraises her 30% limited partnership interest in the family FLP. The underlying NAV is $6 million. The appraiser applies 20% DLOM and 20% DLOC, producing an appraised value of $3.84 million. A gift of this interest uses $3.84 million of exemption, not $6 million.
Common mistake: applying textbook discounts without a formal appraisal. The IRS requires a qualified appraisal for gifts above $5,000 of hard-to-value interests, and the statute of limitations remains open indefinitely if no appraisal is filed.
Valuation discounts matter at FLP funding, at gifts of private company stock, and at estate tax return filings with hard-to-value assets.