The amount by which the value of a small business ownership interest is reduced to reflect the lack of its marketability.

The value of small business ownership interest is affected by its marketability. Marketability is the degree to which this ownership interest can be converted to cash quickly, without unreasonable expense, and with certainty as to the amount of sale proceeds.

Determining the discount for lack of marketability of small business ownership interest relies upon two common approaches:

• Comparison with discounts involving the sale of restricted stock of public companies.
• Comparison with discounts derived from the price differentials between the private stock sale transactions of companies that offer their stock to the public shortly thereafter.

Restricted stock value studies

Holders of restricted stock generally are unable to sell it on the open market for some time. There is a limited private market for these securities, and their selling price can be readily compared to the price of the un-restricted stock of the same company sold on the open market. This can help determine the discount for relative lack of restricted stock marketability.

Pre-IPO stock price comparisons

The selling prices paid by private buyers for stock of closely held companies shortly before the company registers its stock for a public offering can be compared to the public offering share price of the same company. This may provide useful marketability comparisons for closely held small business ownership interests which typically do not sell on a public market.

Most meaningful marketability comparisons apply to valuing minority small business ownership interests, such as partnership shares or minority shareholder positions. Sometimes it is necessary to establish the discount for marketability of a controlling business ownership interest.

Even 100% ownership in a small business is less marketable than stock of public companies. Selling a small business requires considerable effort, time, and expense on the part of the business owners. In addition, market for small businesses may vary significantly, which affects the actual selling price and terms.