Understanding the Discount for Lack of Marketability in Divorce Settlements
Dividing assets during a divorce can be a complex process, especially when privately held business interests are involved. One significant factor that affects the valuation of such assets is the discount for lack of marketability (DLOM). This discount can play a pivotal role in determining the fair division of marital property, ensuring that the valuation accurately reflects the nature of the asset.
What Is the Discount for Lack of Marketability?
The discount for lack of marketability refers to a reduction in the value of a business interest due to its limited ability to be quickly sold or converted into cash. Unlike publicly traded stocks, which can be sold on exchanges like NASDAQ or the New York Stock Exchange within days, privately held company shares often lack this liquidity.
When valuing a minority interest in a closely held or family-owned business, this illiquidity creates additional risk for the owner. A valuation expert applies a DLOM to reflect the time, effort, and risk involved in selling such interests.
Why DLOM Matters in Divorce Proceedings
In divorce cases, business interests are often part of the marital estate and must be equitably divided. However, the value of these interests can vary significantly based on factors like marketability. A lack of marketability can reduce the actual realizable value of the business interest, which is critical for a fair settlement.
For example, a spouse may own a minority stake in a family business. While the business itself may be valued at a substantial amount, the inability to quickly sell or access the full value of the shares necessitates a DLOM adjustment. This ensures that the spouse retaining the business interest is not overcompensated while the other spouse receives a fair distribution.
How Is the Discount Determined?
The application of DLOM is highly subjective and based on various studies and resources, including:
Restricted Stock Studies: Analyzing the differences in value between restricted shares and freely traded shares of public companies.
Pre-IPO Studies: Examining the pricing of companies' shares before they go public.
Market Comparisons: Considering the unique circumstances of the business in question.
Typically, DLOM ranges from 5% to 40%, depending on the specific characteristics of the business interest.
Incorporating DLOM in Divorce Settlements
When dividing marital assets, it is essential to work with valuation experts who can accurately calculate DLOM. Their expertise ensures that the business interest is valued appropriately, taking into account the time and potential risks involved in selling the asset.
Divorcing parties should also consult legal professionals experienced in financial complexities to ensure that the DLOM is properly considered in the final settlement agreement.
Conclusion
The discount for lack of marketability is a critical factor in valuing privately held business interests during divorce proceedings. By understanding and accounting for this discount, both parties can achieve a fair and equitable division of assets. For more guidance on navigating the financial aspects of divorce, visit The Divorce Allies.
FAQs
Q1: Why is the discount for lack of marketability (DLOM) important in divorce?
DLOM ensures that privately held business interests are valued realistically. Without applying the discount, one spouse may be overcompensated for an asset that cannot easily be sold or converted into cash.
Q2: How does DLOM affect the division of marital property?
By reducing the stated value of a business interest, DLOM helps balance the settlement. It ensures that the spouse retaining the business does not receive an inflated valuation while the other spouse receives equivalent but more liquid assets.
Q3: What types of business interests typically require a DLOM adjustment?
DLOM is usually applied to minority stakes in privately held companies, family-owned businesses, or closely held entities where shares cannot be quickly sold in public markets.
Q4: How is the percentage of DLOM determined?
Experts rely on studies such as restricted stock studies, pre-IPO studies, and market comparisons. Depending on the business’s characteristics, the discount may range from 5% to 40%.
Q5: Can spouses dispute the application of DLOM in divorce cases?
Yes. It’s common for each side to retain their own valuation expert, leading to differing opinions about the size of the discount. Courts then review expert testimony and evidence to decide on the appropriate adjustment.
Q6: Who should calculate and apply DLOM in a divorce?
A qualified business valuation expert with experience in divorce cases should perform the calculation. Their expertise ensures the discount is applied fairly and supported by credible data.
