The Discount for Lack of Marketability: An Investigation of Privately Held Companies in North Italy

Abstract

It is broadly accepted that both non-controlling and controlling equity in privately held SMEs are not readability marketable and as a consequence they are considered to be illiquid. The lack of marketability can bring a premium to the investor since he might not be able to sell when his profit is maximized. The premium leads to a decrease in the value of the privately held corporation due to a discount rate that reflects the risk of holding an illiquid and non-marketable asset. Depending on the methodology the premium can be applied directly to the WACC, K-equity or overall value of the company. In this work I will first give a detailed insight about the concept of lack of marketability and liquidity, explaining early thoughts and how methodologies have evolved during the years. Then I will explain what the most used methodologies are and their pros and flaws. In the last chapter I will apply a recent model, to investigate and define the DLOM in North Italy’s privately held companies.