Lack of Marketability Discount
In the valuing the equity of a company, a lack of marketability discount is a discount applied to the overall valuation of that equity. In other words, if a business valuation expert were to value a company at, say, $100,000, the application of the discount would reduce that valuation by a percent. The reason for the application of the discount is that, in closely held companies where there are few shareholders (or members, in the case an LLC
), there will be little if any market for the shares, and therefore the equity shouldn’t be considered to be worth as much because the owner of the shares will have less of a market to sell those shares into. Or, in more simple economic terms, there will be less demand for equity in a closely held company than there will be for equity in a large, publicly traded company. Again, the reason being that in large, publicly held companies, there is a much larger market to sell into. Therefore, selling those shares is easier and no discount is applied. Small business owners often neglect to take such discounts into consideration when considering the valuation of their own equity. Until the shares have a market for them, then such a discount is often properly applied.