Estimating Discounts for Lack of Marketability: Understanding Alternative Approaches—Put Options Versus Monetizing an Option Collar

Abstract

The method for calculating a discount for lack of marketability (DLOM) has been a subject of debate for several years. Professionals have searched for alternatives to the traditional sources to quantify the DLOM. This search has led to increasing reliance on the use of financial derivatives to help determine a proxy for the DLOM. The most common derivative used to quantify DLOM is some form of put option. However, research is ongoing concerning the use of derivatives to estimate the DLOM. Recent literature has discussed the use of at-the-money collars and prepaid variable forward contracts to arrive at the DLOM. Another article in the spring 2015 edition of the Business Valuation Review takes a different position on how derivatives should be used to estimate a DLOM. This article highlights and discusses the differences between these approaches.