Succession & Estate

DLOM Models Compared

Compare the three families of marketability-discount evidence (restricted stock, pre-listing transactions, and option-based models) for what each actually measures, what it silently assumes, and where each one breaks.

  • Expert
  • 10 min total
  • 12 chapters

What decision this helps you make: Which method or combination of methods to rely on for a lack-of-marketability discount, and how to reconcile them into a number you can defend line by line.

What this topic is

The discount for lack of marketability is the reduction in value that reflects the inability to convert an interest into cash quickly at a known price. Three broad approaches supply evidence for it: empirical studies of restricted stock in public companies, studies of transactions occurring before a company went public, and quantitative models (mostly option-pricing based, plus shareholder-level cash flow models) that compute the cost of being unable to sell.

Why it matters

This single percentage often moves the value of a transferred interest more than every other assumption combined, and it is the assumption with the weakest observational foundation. Each family of evidence measures something adjacent to, rather than identical to, the problem being solved. Knowing precisely how each one differs from your subject interest is the difference between an analysis and a citation.

Who should learn it

Appraisers, tax controversy practitioners, estate planners evaluating an appraisal before it goes on a return, and owners who want to understand what the number in their report rests on.

What you will understand

  • What restricted stock studies actually measure, and why the 1997 and 2008 holding period changes moved the observed discounts
  • Why pre-listing studies produce the largest discounts and attract the most criticism
  • How the option-based models differ (put, lookback put, average-strike put), and which assumption each one is making about market timing
  • How to reconcile several methods into one supportable conclusion rather than averaging them

Prerequisites

Common misconception

"The studies show about 35%, so 35% is the discount." The studies show what buyers paid for a restriction of known duration on a security of a publicly traded company with an observable price and mandatory disclosure. A 12% interest in a private manufacturer with compiled statements, no distributions, no market, and no exit is a different thing in every one of those respects. The study range is a boundary condition. It is not an answer, and treating it as one is the specific practice the Service's own guidance criticises.