Marketability Discount (DLOM): The UK Guide

What is a marketability discount?

A marketability discount - more formally a discount for lack of marketability ("DLOM") - is the reduction applied to the value of unquoted shares to reflect the fact that the holder cannot sell them promptly, anonymously and at full value in the way an investor in a listed company can. It is the bridge between the value of shares that *could* be sold tomorrow on a public market and the value of shares that, in practice, take months or years to monetise.

DLOM is one of the two adjustments - alongside the minority discount - that UK valuers apply when moving from the value of the company as a whole to the value of an individual block of shares within it. The two are distinct and not interchangeable.

Why marketability matters

A listed share is a near-cash asset. It can be sold on a regulated exchange in seconds, at a quoted price, with minimal transaction cost, and with no requirement to disclose the seller's identity or rationale to the buyer. An unquoted share is none of those things:

• There is no continuous market. A willing buyer has to be sourced.
• The buyer typically requires full disclosure, due diligence and a long-form sale agreement.
• Transfer is almost always subject to pre-emption rights, board consent or a shareholders' agreement gate.
• Realistic time to monetise is 6 to 24 months and frequently longer.
• The seller bears legal, advisory and warranty costs that, in percentage terms, are far larger than a listed-market transaction.

The cumulative effect of those frictions is value-destructive, and the marketability discount quantifies it.

DLOM vs the minority discount

The two adjustments are routinely confused. They address different questions:

Both apply to a minority block in a private company. Only DLOM (typically) applies to a 100% interest, because even a sole owner of a private business cannot realise value in the way a listed shareholder can.

The two discounts are applied multiplicatively, in sequence:

`Minority value = pro-rata equity x (1 - minority discount) x (1 - DLOM)`

A 30% minority discount followed by a 25% DLOM produces a combined effective discount of 47.5%, not 55%. The multiplicative approach is the UK convention and the form HMRC expects.

Typical UK ranges

There is no statutory or HMRC-published figure. As a working frame:

These are ranges, not rules. The actual figure is built bottom-up from the facts of the specific holding.

What drives DLOM up

The discount widens where:

• No identified buyer pool. Sector and size combine to limit the universe of credible acquirers.
• Restrictive articles. Strong pre-emption rights, board consent on transfer, drag rights triggered at the discretion of others.
• Concentrated register. A single dominant shareholder reduces optionality for any minority.
• No dividend history. The holding's economic return depends entirely on a future exit event.
• Specialist or owner-dependent business. Key-person risk lengthens diligence and warranty negotiations.
• Recent loss-making years. A buyer will require a longer review period and more conservative pricing.
• Pending litigation or regulatory issues. Diligence becomes open-ended.
• Non-standard share class. Preference shares, ratchets and alphabet classes all reduce liquidity relative to ordinary shares.

What drives DLOM down

The discount narrows where:

• Clear and credible exit pathway. A board-approved sale process, IPO timetable or known trade-buyer interest.
• Established internal market. A history of intra-shareholder transfers at reference prices.
• Pre-agreed redemption or buyback. Put-and-call structures with defined valuation mechanisms.
• Drag and tag rights aligned with realistic events. Tag-along in particular supports value.
• Strong, predictable dividend record. Reduces dependence on a sale event for return.
• Standalone, transferable business model. Light owner dependency, full management team, documented systems.
• Audited accounts and clean tax history. Shortens diligence.

How HMRC reviews DLOM

The Shares and Assets Valuation ("SAV") team approaches DLOM the same way it approaches the minority discount: it benchmarks the chosen figure against the ranges seen in agreed cases, tests the supporting facts, and probes the cumulative effect of DLOM combined with any minority discount.

SAV's review focuses on:

• Is the chosen percentage anchored? A bare assertion ("we have applied a 30% discount") will be challenged. A reasoned narrative referencing the company's transfer regime, dividend history, comparable agreed cases and time-to-monetise estimate will not.
• Is the evidence base UK-relevant? US restricted-stock studies (Silber, Management Planning, FMV) and pre-IPO studies (Emory, Willamette) are widely cited in valuation textbooks. SAV will accept them as background reference but expects the valuer to translate them into UK terms - the US studies are not direct comparables for UK SMEs.
• Is the cumulative discount defensible? A 35% DLOM applied alongside a 40% minority discount produces an effective discount of 61%. SAV will examine whether the facts genuinely support that depth of reduction.
• Has the right standard been applied? Section 272 TCGA 1992 requires a hypothetical open-market sale. The DLOM has to reflect the friction in that hypothetical sale, not the friction in a specific real-world deal that may have been more or less constrained.

A defensible UK DLOM report sets out the time-to-monetise analysis, the transfer-regime analysis, the comparable-case anchor and the chosen percentage in a structure SAV can follow line by line.

The US studies and why they need translating

Most of the published quantitative literature on DLOM is US-based:

• Restricted-stock studies compare the price of restricted (illiquid) shares of listed US companies to the same companies' freely tradeable shares. They typically observe discounts of 25% to 35%.
• Pre-IPO studies compare the price at which shares of soon-to-be-listed US companies are transacted in the months before listing to the eventual IPO price. They typically observe discounts of 30% to 50%.
• Option-based models (Longstaff, Finnerty, Chaffe) derive DLOM from the cost of a hypothetical put option that would hedge the holder's price risk over an assumed lock-up period.

These are useful sanity-checks. They are not direct UK comparables. The restricted-stock studies measure the discount on shares that are otherwise listed; UK SME shares are never listed. The pre-IPO studies measure the discount on shares with a known short-term listing event; most UK SME shares have no such event. Both data sets reflect US legal, tax and market conditions.

UK practice is to use the international studies as a *range frame*, then anchor the chosen discount in UK-specific facts: the articles, the shareholders' agreement, the register, the dividend history and comparable agreed cases.

Worked example

A holder owns 20% of a UK trading company with a pro-rata equity value of £2.0m. The articles include standard pre-emption rights, board consent on transfer, and a deadlocked dispute resolution mechanism. There is no recent dividend; the company reinvests profits. No exit process has been initiated.

Minority discount analysis:

• 20% sits below the 25% blocking threshold; no statutory special-resolution veto.
• Register is concentrated (one 60% holder, two minorities).
• The valuer concludes a minority discount of 30%.

DLOM analysis:

• Realistic time to monetise: a full pre-emption round plus external sale negotiation runs to 12-18 months.
• Buyer pool is narrow (sector niche, owner-dependent).
• No dividend supports interim economic return.
• Comparable agreed UK cases sit in a 25%-35% range for similar facts.
• The valuer concludes a DLOM of 30%.

Applying both:

`£2,000,000 x (1 - 30%) x (1 - 30%) = £2,000,000 x 70% x 70% = £980,000`

The combined effective discount is 51%, with each adjustment quantified, justified and benchmarked separately - the form HMRC expects.

DLOM in specific contexts

• EMI valuations (UMV vs AMV). The gap between Unrestricted Market Value and Actual Market Value on an EMI valuation is itself a marketability-style adjustment, reflecting the restrictions that apply under the articles and option agreement. It is conceptually adjacent to DLOM but reported separately on VAL231.
• Inheritance tax. DLOM is a core part of any IHT400 share valuation. SAV typically agrees DLOM in a range without requiring the option-based models, provided the report is well-evidenced.
• Capital gains tax. Gifts, share buybacks at non-arm's-length values and intra-family transfers all attract DLOM at the market-value standard. Business Asset Disposal Relief does not change the underlying valuation.
• Pre-sale planning. A management buyout, employee ownership trust or family transfer can be priced more competitively if the valuation transparently isolates DLOM and the parties accept a reasoned figure.
• Matrimonial and partnership disputes. Courts apply DLOM but may temper it where the underlying conduct of the controlling party is the cause of the illiquidity.

Common mistakes

FAQ

Related guides

• Minority discount: how UK minority shareholdings are valued - the parallel adjustment for lack of control
• What is HMRC SAV? - the team that reviews DLOM on IHT, CGT and ERS returns
• UMV vs AMV explained - the parallel discount framework for employment-related shares
• What is my business worth? - the enterprise-value starting point