What is a discount for lack of marketability in a business valuation?

Marketability is about how easily an ownership interest can be turned into cash. CBV Institute’s glossary defines a discount for lack of marketability as an amount or percentage applied to the value of an ownership interest to reflect a relative lack of marketability. This page covers the definitions and where the CRA’s policy statement touches the subject. It does not say how a discount is chosen or how large it is, because the sources used here do not, and it is a question for a qualified valuator.

Marketability, liquidity and control

The glossary defines marketability as the ability to quickly or readily convert an asset, business or investment to cash at minimal cost, and says it is affected by, among other things, the particular market in which the asset is expected to transact and the characteristics of the asset. It defines a discount for lack of liquidity in similar terms. A discount for lack of control is a separate item: an amount or percentage deducted from the pro rata amount of the entity’s whole equity value, when determined on a controlling-interest basis, to reflect the absence of some or all of the economic benefits of control.

What the CRA says

The CRA’s Information Circular 89-3 defines a closely held corporation as one whose shares are owned by a relatively limited number of shareholders, with no established market because the shares are sold infrequently. It says fair market value must be determined by referring to share rights and restrictions in the articles, by-laws or valid contracts between shareholders, which can have an appreciatory or depreciatory effect on the price a willing purchaser would pay. It lists control or minority interests among the factors specific to a shareholding.

Questions to ask

BDC says valuation is a qualitative exercise and not formulaic. Ask the valuator whether any discount was applied, which kind, and what in the file supports it. Ask whether a shareholder agreement or the articles restrict transfer of the shares, and whether the valuator considered them. See how a minority stake is valued.