Succession & Estate

Minority and Marketability Discounts

Separate the two discounts that decide what a block of private stock is worth, derive each from evidence rather than habit, and combine them the way that is actually correct.

  • Advanced
  • 9 min total
  • 12 chapters

What decision this helps you make: What level of value a specific block should be valued at, what discount for lack of control and lack of marketability the facts support, and how to document both well enough to survive an examination.

What this topic is

Two conceptually distinct adjustments applied when valuing an interest in a closely held business. The discount for lack of control reflects that a holder who cannot direct distributions, compensation, or a sale owns something less valuable than a proportionate share of the whole. The discount for lack of marketability reflects that there is no ready market for the interest: no exchange, no buyers, no ability to convert to cash quickly at a known price.

Why it matters

These two adjustments routinely move the value of a gifted or inherited block by 25% to 45%, and they are the most frequently contested items in transfer tax valuation. Applied with evidence, they are legitimate and well-established. Applied by habit (a round number pulled from a study nobody reads), they are the single easiest thing for an examiner to attack, and the resulting adjustment often carries a penalty on top.

Who should learn it

Owners planning gifts of business interests, executors valuing an estate, appraisers who must defend a number, and advisers who need to know when a discount is being asserted rather than supported.

What you will understand

  • The levels-of-value framework and which discount moves you between which levels
  • How lack-of-control discounts are actually derived, and why the common derivation from public control premiums is criticised
  • The Mandelbaum factors and how a marketability discount is built up rather than selected
  • Why discounts multiply rather than add, and what happens when they are stacked without support

Prerequisites

Common misconception

"We take 20% for minority and 30% for marketability, so 50% off." Two errors in one sentence. The discounts are sequential, not additive: 20% then 30% is 44%, not 50%. And neither number should be a default. A minority block in a company that pays generous distributions, has a funded buy-sell providing a real exit, and is managed professionally deserves far smaller discounts than one in a company that has never distributed a dollar and has no exit at all. The percentages are conclusions, not starting points.