In the case of Fair v. Fair, the Louisiana Appellate Court examined the impact of the discount for lack of marketability (DLOM) on the valuation of a closely held business. This article focuses on the use of DLOM as a factor in determining damages and aims to provide insights into the importance of considering marketability when valuing privately held businesses.
The plaintiffs sought damages for the alleged undervaluation of their interest in a closely held business, arguing that the defendants improperly applied a DLOM. The discount for lack of marketability represents a reduction in the value of an ownership interest in a business due to the absence of a readily accessible market for its shares.
The expert witnesses for both parties in the case employed different valuation methodologies and assumptions when calculating the DLOM. The plaintiffs' expert argued that a lower DLOM should be applied, while the defendants' expert supported a higher DLOM, resulting in a lower valuation of the business.
The Court considered the expert testimony and examined various factors that can impact the DLOM, such as the size of the company, its financial performance, the nature of the industry, and the level of control and marketability of the ownership interest. After analyzing these factors, the Court concluded that the defendants' expert's higher DLOM was more appropriate in the case, leading to a lower valuation of the business and a smaller award of damages to the plaintiffs.
This case underscores the importance of considering the discount for lack of marketability when valuing closely held businesses. DLOM can significantly impact the value of a business interest and, consequently, the amount of damages awarded in disputes involving privately held companies.
Valuation professionals and lawyers should be aware of the various factors that can influence the DLOM and ensure that their valuation methodologies and assumptions are supported by empirical evidence and finance literature. A thorough understanding of the nuances of marketability and the application of appropriate discounts can be crucial in achieving accurate and reliable valuations in litigation involving privately held businesses.
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