Application of Discounts in Valuation of Interests in Privately Held Entities

by Jaburg Wilk

Jaburg Wilk

When representing high net worth individuals in divorce proceedings, frequently one of the assets is an ownership interest in a privately held business or professional practice.  Establishing a value for the business can be one of the most hotly contested aspects of the divorce.  Standards, or definitions, of value have been developed as a framework for answering the question of what a business is worth in a judicial context. The two recognized standards of value are fair market value and fair value aka investment value.   

Conceptually, value is a continuum.  It ranges from value being established between a hypothetical willing buyer and a seller (the fair market value) to value to the holder which is established by the asset being valued as not sold but maintained (fair value). Generally, lack of control and marketability discounts is applied when the fair market standard is used; these discounts are not applied when the fair value standard is adopted. Frequently, the parties argue about whether these discounts should apply and the magnitude of them when the value of a business is at issue in a divorce.  

The starting point in an expert’s analysis is to determine the value of a 100%controlling, marketable ownership interest in the business. Then the expert, and ultimately the court, must determine if under the particular facts of the case it is appropriate to apply any discount to that value conclusion. The most common valuation discounts arise from the basic concepts of control and marketability. Discounts for lack of control (DLOC) attempt to quantify the level of risk assumed by a non-controlling shareholder. This discount is often referred to as a minority share discount, but it is important to note that majority shareholders can also lack full control, or meaningful control. Discounts for lack of marketability (DLOM) attempt to quantify the degree to which there are risks resulting from the time and uncertainty for an ownership interest to be converted into cash.    

Discounts for Lack of Control 

To determine whether a DLOC should be applied to the subject ownership interest the valuation expert seeks to determine if the holder of that interest can unilaterally exercise the “prerogatives of control.”   The most significant are the abilities:  

·      Make distributions from the business, in other words, the ability to take money out of the business.  

·      Sell the company. 

·      Determine management compensation. 

·      Replace management. 

Conceptually, DLOC also ties to the definition of fair market value. For an investment to be attractive to a non-controlling investor, the willing buyer of a non-controlling ownership interest would expect a per share price discount from what he or she would pay for a controlling ownership interest.  Secondly, that willing buyer would consider the advantages and disadvantages arising from the degree of control afforded by the subject ownership interest. 

Discounts for Lack of Marketabilty 

In almost every divorce case, the spouse who is awarded the ownership interest in the business has no immediate intention of selling that interest.  Valuation experts typically use the standard of whether or not the holder of the interest can sell the ownership interest and realize cash within three business days to determine whether the interest is “marketable,” and this is the starting point when considering whether a DLOM should be applied. In the context of business valuations, the terms “marketability” and “liquidity” are often used imprecisely or interchangeably. Most analysts capture both elements in a DLOM.  

The Factors that Support a DLOM Include: 

·      Uncertain time horizon to complete the sale. 

·      Cost to prepare for and execute the sale. 

·      Risk concerning the eventual sale price. 

·      Non-cash and deferred transaction proceeds. 

While these factors are presented in the context of considering the propriety of a DLOM applied to non-controlling interests, the same rationale supports application of a DLOM to a controlling interest in a private company. This continues to be an unresolved and somewhat controversial issue.  

Courts Provide Some Guidance 

Division One of the Arizona Court of Appeals,  in Schickner v. Schickner,  recognized the trial court’s authority to consider, on a case-by-case basis, whether discounts should be applied when determining the value of a business in the context of a divorce, governed by the broad standard of whether it would be “appropriate” given the overall mandate of equitable distribution.   Reviewing cases from various jurisdictions demonstrates that whether it is appropriate to apply either discount is very fact specific.  

The Schickner court specifically mentioned whether or not the spouse has any immediate intention to sell as a factor to consider, and courts in other jurisdictions have similarly identified it as a relevant factor.  The court in Schickner recognized the lack of marketability as a factor to be considered in whether a discount was appropriate without specifically recognizing that the discounts for lack of control and lack of marketability are typically analyzed and presented separately by experts. 

Because the courts have broad authority and the published decisions are case and fact specific, predicting whether the court will adopt a standard of value that includes application of discounts for lack of control and lack of marketability will continue to be a challenge in every case.  


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jaburg Wilk | Attorney Advertising

Written by:

Jaburg Wilk

Jaburg Wilk on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.