What it means
Valuation usually starts by comparing a private business to listed companies or to observed transactions. Those benchmarks come from markets where shares are liquid, so applying them directly to an unlisted holding would overstate its value and a marketability discount corrects the mismatch.
The reason a buyer pays less is practical rather than theoretical. Selling a private stake means finding a buyer, negotiating, running due diligence and often waiting a year or more, all while the money is locked up and the outcome is uncertain.
Valuers support the size of the discount with several strands of evidence, including studies of restricted shares in listed companies and of private transactions that later preceded a public offering. None of these methods is conclusive, so professional judgement about the specific holding does most of the work.
Several factors move the number. A holding with a ready buyer, a shareholders agreement allowing redemption, strong dividends and audited accounts justifies a smaller discount; one with transfer restrictions, no dividend policy, patchy records and no obvious purchaser justifies a larger one.
It is important to keep this discount separate from a discount for lack of control, which reflects a minority holder's inability to set strategy, dividends or salaries. The two are commonly applied in sequence rather than added together, and confusing them leads to double counting.
In practice
Real-world examples.
Example
A departing shareholder in a private software firm expects a fifth of the company's $10,000,000 headline value, or $2,000,000. After minority and marketability discounts the valuation lands closer to $1,200,000, and the argument shifts to whether the shareholders agreement permits any discount at all.
Example
An estate holds 30% of a family hotel group. The tax valuation applies a 30% marketability discount because the shares carry pre-emption rights restricting transfers to existing shareholders, materially reducing the taxable value.
Example
A private equity fund buys a minority stake in a manufacturer and negotiates a put option requiring the founder to repurchase after five years at an agreed formula. The option creates a route to exit, and the valuer applies only a 10% marketability discount as a result.
Formula
Calculation
Value after discount = Marketable value x (1 - discount rate), applied after any control adjustment. Take a private logistics company where a valuer concludes the whole business, on a control basis, is worth $5,000,000, and the shareholder in question owns 100% of a stake being valued for an estate. A 20% discount for lack of control brings the figure to $5,000,000 x (1 - 0.20) = $4,000,000, the value of a marketable minority interest. A 25% discount for lack of marketability then gives $4,000,000 x (1 - 0.25) = $3,000,000, and the discount itself is $4,000,000 - $3,000,000 = $1,000,000. Note that the combined effect is $3,000,000 / $5,000,000, a 40% total reduction, not the 45% you would get by simply adding 20% and 25%.Case study
Seen in the real world.
Ashcombe Freight is an illustrative, fictional haulage company used to show how these discounts interact. When one of four founding shareholders died, the estate needed a valuation of a 25% holding. The company's accountant produced a whole-business value of $5,000,000 based on comparable listed operators and argued the holding was therefore worth $1,250,000.
The valuer engaged by the estate disagreed on two counts. The listed comparators were controlling, liquid and quoted, whereas this holding could neither direct the company nor be sold outside the founder group, so a lack of control discount and a lack of marketability discount were both appropriate. Applied in sequence at 20% and 25%, they reduced the underlying value from $5,000,000 to $3,000,000, making the 25% holding worth $750,000.
The surviving shareholders had expected to buy the stake cheaply and were surprised to find the discounts working in their favour; the estate, understandably, was not pleased. The illustrative takeaway is that these discounts are large, contested and worth agreeing in a shareholders agreement long before anyone dies or leaves.
Watch out
Common mistakes.
- Adding the lack of control and lack of marketability discounts together rather than applying them one after the other, which overstates the total reduction.
- Using a standard 30% discount for every private holding, when the correct figure depends heavily on transfer restrictions, dividends and the existence of likely buyers.
- Applying a marketability discount to a valuation that was already derived from private company transactions, where the lack of liquidity is already reflected in the price.
Questions
People also ask.
Does a controlling stake get a marketability discount too?
Usually a smaller one, because a controlling holder can force a sale of the whole business, but selling a private company still takes months and costs money.
Who decides the percentage?
A qualified valuer, supported by empirical studies and by the specific facts, and in disputes the figure is frequently argued over by opposing experts.
Can the discount be avoided?
Largely yes, if the shareholders agreement specifies a valuation formula that excludes discounts, which is why the drafting of that agreement matters enormously.
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