Valuation Discounts & Their Practical Application

In the realm of business valuation, discounts are downward adjustments made to account for elements that reduce the worth of a business interest when compared to an ideal scenario involving full marketability and control. The opposite is valuation premuims, and they exists, but are not as commonly used.

These adjustments are meant to capture the real-life risks and constraints that impact the actual price a willing buyer might pay- However, the discounts may become too theoretical if applied using predetermined formulas instead of sound judgement. This is something is repeated thrughout Revenue Ruling 59-60.

Defining a Valuation Discount

Valuation discounts represent modifications made during the appraisal of a business to reflect traits that lower the appeal or ease of selling an ownership stake.

They are particularly relevant in appraising minority holdings, privately owned enterprises, or firms that rely heavily on specific individuals for their operations.

These reductions aim to more accurately present fair market value, incorporating real-world limitations such as absence of control, illiquidity, or reliance on key personnel.

Applying these discounts correctly requires thoughtful, case-specific analysis rather than simple dependence on general studies or formulas. Otherwise, the valuation violates Revenue Ruling 59-60.

Major Types of Valuation Discounts

Several types of discounts are routinely employed in business appraisals. Among the most common are the following:

Discount for Lack of Marketability

The Discount for Lack of Marketability (DLOM) addresses the challenge of selling a privately owned business compared to the ease of liquidating publicly traded stock.

While public company shares can usually be sold quickly and at low cost, private businesses often involve protracted sale efforts, higher transaction costs, and greater unpredictability. Many small business owners are never able to complete a successful sale, even under favorable market conditions, as statistics paint a dark picture.

Learn more about DLOM

Discount for Lack of Control

Discount for Lack of Control (DLOC) is the result of investors seeking compensation for the increased risks that come along with being in a non controlling position.

Without control, investors face elevated risks — they can’t dictate business strategies, manage the company’s financial flows, or make key decisions about selling or winding down the business.

That said, the impact of limited control depends heavily on specific governance arrangements, investor rights, and the norms of the industry involved.

Learn more about DLOC

Key Person Discount

A Key Person Discount applies when a business’s performance and value are closely tied to one individual, almost always founder/CEO but in rare occasions, someone else.

Dependence on a key person introduces risk — if that person exits, retires, or passes away, the business may encounter significant operational and financial strain.

Assessing the presence and size of a Key Person Discount requires a tailored review of factors like leadership depth, how easily customer relationships can be transferred, and the business’s ability to operate successfully without that individual.

Learn more about key person discounts

Implementing Valuation Discounts in Practice

Typically, valuation discounts are applied after the business’s baseline value has been calculated, near the end of the valuation process.

Discounts for marketability issues, lack of control, or key person risk should always reflect the unique characteristics of the business interest under evaluation.

Relying heavily on outdated data compilations — many of which trace back to conditions from decades ago (incl to the Vietnam war era) — falls short of the practical insight and judgment needed for credible valuations. Such practices don’t align with Revenue Ruling 59-60 and diverge from the way real transactions take place.