Should there be a discount for lack of marketability (DLOM) for a 100% controlling interest in a privately held business?
In a recent Indiana divorce appellate decision, Kakollu v. Valdlamudi, the court upheld that there should be no DLOM for a 100% controlling interest, as the husband had no intent to sell his business. This remains a very unsettled topic in the valuation profession. In a recent survey by Business Valuation Resources (BVR) 33% of appraisers responded they apply a DLOM in this instance, 27% said no and 40% responded maybe. Those that argue there should be a DLOM for a 100% controlling interest often cite the following: · Time needed to sell an interest in a privately held business. i.e you cannot just call your broker and receive cash in three days. · Transaction costs, underwriting fees and other costs to prepare a company for sale · Uncertainty/risk as to expected sales price and proceeds Those that argue there should be no DLOM for a 100% controlling interest often cite the following: · A holder of a 100% interest can sell the company, and realize cash flows and direct distributions during a sale period · The rates of return and multiples used to derive a valuation are based on companies that would also take time to sell a 100% interest in. I.e., this is not unique to privately held businesses. And lastly, those that cite restricted stock studies or other studies of non-controlling interests in support for or against a DLOM for a 100% controlling interest in a company... well they are just wrong! Remember, there is still no empirical data to support or refute DLOMs for 100% controlling interests in privately held companies.
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