Discount for Lack of Marketability

Shares in listed companies can usually be sold quickly at a known market price. Shares in private companies, or shares subject to restrictions on sale, cannot. Buyers are generally willing to pay less for investments that are difficult to sell, because they may have to wait a long time or accept a low price when they want to exit.

The discount for lack of marketability reflects this. For example, if a valuation suggests a stake in a private company would be worth 10 million if it could be freely traded, applying a 30% discount for lack of marketability gives a value of 7 million.

The size of the discount depends on factors such as how long the investor might have to wait for a sale, the company's size and financial health, restrictions on transferring shares, the likelihood of a future sale or stock market listing, and whether the company pays dividends.

These discounts are commonly applied in valuations for tax purposes, divorce settlements, shareholder disputes and private company transactions. Estimating them involves judgment, often supported by studies of restricted shares and pre-listing sales, and they are often contested.