Lack-of-marketability discount
A lack-of-marketability discount is a valuation adjustment that lowers the value of a closely held interest for marketability. Owners of businesses, real estate and private investments meet the term when a limited liability company (LLC) interest, a family limited partnership (FLP) interest or an unlisted stock interest is valued. A combined discount may also account for lack of control.
How it works
Practitioners describe marketability and control as factors supporting lower values for closely held interests than comparable publicly traded interests. A publicly traded interest is the comparison point, and the difference in value reflects those two factors.
Court decisions recognize that valuation of unlisted stock may account for marketability, minority status, or control. Marketability is one of three considerations named in those decisions.
Where it shows up for owners of businesses, real estate and private investments
Interests in an LLC, an FLP or unlisted stock held by an owner are the interests to which the discount is applied. A business owner with shares in a private company, a real estate investor with an LLC interest and a holder of a private investment partnership interest all hold interests of that kind.
The Tax Court adjusted a taxpayer's discount analysis and selected a 30% combined discount for lack of marketability and lack of control. The combined figure shows how a single percentage can express both factors together.
Points that are easy to confuse
A combined discount expresses lack of marketability and lack of control in a single percentage. Court decisions treat marketability, minority status and control as separate considerations in the valuation of unlisted stock.
Marketability and control are different factors even when an appraiser reports them as one number.
Common questions
What does funding an LLC or FLP with cash have to do with the discount?
The type of asset held inside the entity bears on the size of the discount.