The discount for lack of marketability is widely accepted by courts, valuators, and the IRS in valuing an interest in a business that lacks a ready market for its shares. Determining the size of the discount is challenging, and there are many factors that should be considered.

In many situations, the difference in value between readily marketable company stock and less freely marketable stock can be measured. Examples include:

• Initial pubic offerings (IPOs). Pre-IPO stock transactions usually factor in a discount. Studies of private transactions prior to an IPO show that discounts averaging between 40 percent and 60 percent are applied because the shares are not freely traded.
• Options. The cost of a put option may provide a measure of the marketability discount. For instance, if you hold restricted stock and purchase an option to sell the shares at the free market price, then you have purchased marketability. The price of the put option is the discount for lack of marketability.
• Restricted stock. Restricted stock, or "letter stock," is similar to common stock except for restrictions prohibiting sale on the open market for a specified period of time. To reflect this lack of marketability, there is a built-in price difference between the two classes of stock. Discounts usually fall between 23 percent and 36 percent.

Numerous factors influence the size of the marketability discount, including:

• How large an interest is being valued? The size of the block of stock can affect the marketability discount, and even small differences can greatly affect the size of the discount. A larger block of stock gives the owner greater ability to influence the company. For instance, a 34 percent interest may be more marketable and valuable than a 32 percent interest if a two-thirds majority is required for certain corporate actions. Although it is still a minority interest, the 34 percent interest would give the holder power to block some corporate actions.
• Are the costs of taking the company public or selling it prohibitive? Even if you own a controlling interest in a business, there may be some lack of marketability due to costs associated with making the stock liquid. Arranging for an IPO or a business sale can involve underwriting, accounting, and legal fees that amount to illiquidity costs for a small or mid-sized business.
• What is the market for the stock? Whether you have a controlling interest in a company or a large minority block, your ability to sell may be determined by the supply and demand of the market. If trading activity for the shares is typically thin, you may have a hard time unloading a large block of stock.

Conducting a thorough analysis of a company can help ensure that an appropriate marketability discount is applied. The final number can be influenced in many ways, and a valuator should produce a well-supported report that takes into consideration all of the factors affecting marketability.