DISCOUNTS FOR LACK OF MARKETABILITY (DLOM)

Saturday Brain Storming Thought (206) 20/01/2024

DISCOUNTS FOR LACK OF MARKETABILITY (DLOM)

A discount for the lack of Marketability is the implicit cost of quickly monetizing a non-marketable asset at its current value. These discounts are used in many venues to determine the fair market value of a non-marketable such as a privately held business.

DLOM ranges

The consensus of many studies is that the DLOM ranges between 30% to 50%

Factors affecting DLOM

1) minimul volatility in the value of the underlying assets

2) above average expectations for future yield

3) a proven and stabilized history of income

4) the certainty of distributions or expectation of capital appreciation

5) the limited time period on restriction of ability to sell the interest

6) favourable outlook for the future growth of the entity

Discount for lack of control (DLOC)

DLOC accounts for the reduced value of a minority interest due to the absence of control

Discount for lack of Marketability (DLOM)

DLOM reflects the impact of liquidity or limited Marketability

Discount Pricing

Discount Pricing is a type of promotional pricing strategy where the original price for a product or service is reduced to increase traffic, move inventory and driving sales

Discount price calculation

1) look at the original price

2) figure out discount percentage

3) Calculate the savings

4) substract the savings from the original price and you will get the sales price

Discount Price = (original price) – (original price X discount/100)

Types of Discount Pricing

1) Seasonal

Businesses offer promotional discounts on seasonal goods or during particular seasons

Seasonal discounts are applied to out of season merchandise to sell old inventory

2) Clearance

It use to indicate their products are for sale at unusual discounts, such as buy one get one free offer for a limited time only ie to liquidate what’s left in shop

3) Volume

A volume discount incentivizes customers to purchase goods in multiple or large quantities

Key Takeaways for DLOM

1) DLOM is a financial concept that measures an investment or assets value reduction because of its limited liquidity

2) it assists in accounting for the difficulty of selling certain assets in the open market

3) some assets may take longer to sell or find it difficult to get potential buyers or investors

4) the estimation is subjective and may vary according to market conditions and the evaluators perception

Challenges to DLOM

1) DLOM estimation process involves professional judgment and can be subjective

2) different evaluators may arrive at various discount rates based on their interpretation of the data and techniques used

3) obtaining accurate and reliable data for valuing assets can be challenging

4) limited transaction data and market information may result in inaccurate DLOM estimates

5) there is no universally accepted method for calculating DLOM

6) different approaches and models may yield different results, resulting in discrepancies in the estimations

7) several factors influence DLOM, including time to Marketability, restrictions on transferability, market conditions and investors demand

8) assessing and quantifying these factors accurately can be a complex procedure

9) valuing the assets and applying DLOM may have legal and regulatory implications

10) compliance with relevant laws, regulations and standards complicates the analysis

11) the ongoing market conditions can impact the assets liquidity and marketability

12) market volatility, economic fluctuations, industry trends and shifts in market sentiments can influence DLOM

13) DLOM estimation may require regular reassessment

Factors affecting DLOM

1) assets characteristics

2) prevailing market conditions

3) companies financial performance and prospects

4) the ownership interests size

5) market volatility

6) presence of control or voting rights

7) level of information transparency

8) legal and regulatory considerations

9) overall perceived risk related to assets marketability

Core concepts in discounting

1) marketability

2) liquidity

3) holding period

4) liquidation period

5) price pressure

6) price risk/volatility

Marketability

The capability and ease of transfer or scalability of an asset, business, business ownership interest or security

Liquidity

The ability to readily convert an asset, business, business ownership interest or security into cash without significant loss of principal

Marketability discount rate

The marketability discount is typically estimated by comparing the calue of a restricted or illiquid asset with the value of a similar but more liquid asset

The difference between the two values represents the discount applied to the restricted or illiquid asset

Trade discount

Trade discount is a reduction in the products list price

Cash discount

Cash discount isa discount made by a company to its consumers to promote early payment

Discount effect definition

1) the whole order – discount will be applied to the total order amount

2) select item -: discount will be applied only to selected items

3) proportionally to amount – each item is discounted proportionally to its share in the total discounted items amount

4) proportionally to quantity – each item is discounted proportionally to itsshare in the total quantity of the discounted items

5) most expensive/cheapest item – the effect will apply the discount only to the cheapest/most expensive items in the cart

6) missing items/new items – this effect is only available for unit discounts.