In Canadian business valuations, the discount for lack of marketability is used to reflect the reduced value of an ownership interest in a private company due to its limited liquidity. Unlike shares of public companies, private business interests cannot be easily sold. This discount accounts for the added effort and time required to convert ownership into cash.

Understanding Marketability

Marketability refers to the ease with which an asset can be sold. Public shares offer fast and easy liquidation. Private company shares, however, involve finding a buyer, negotiating terms, and paying legal and advisory fees. This makes them less appealing and less valuable to investors.

This discount is separate from the discount for lack of control, which applies when an owner cannot influence decisions. Marketability focuses purely on how quickly an ownership interest can be converted into cash.

Common Use Cases in Canada

The discount for lack of marketability appears in several contexts:

• Estate and succession planning

• Shareholder exit strategies

• Marital property divisions in divorce

• Private company share valuations for tax planning or litigation

Factors That Influence the Discount Amount

Several considerations affect the size of the marketability discount:

• Dividend policy: Steady income lowers perceived risk

• Exit provisions: Shareholder agreements with clear exit clauses reduce the need for large discounts

• Financial health: More profitable, stable companies attract more interest

• Size and control: Small, minority interests typically require higher discounts

• Upcoming liquidity events: If a sale or IPO is likely, the discount may be lower

Methods Used by Canadian Valuators

Professional appraisers use several methods to determine a reasonable DLOM:

• Restricted share studies provide real-world data on illiquidity effects

• Pre-IPO studies help estimate the discount in the period before a company goes public

Other valuation models, including option pricing, may be used depending on the situation. Canadian courts and tax authorities require clear justification for the applied discount.

Importance of Defensible Analysis

A valid discount must be backed by a detailed valuation report. It should include:

• Clear rationale for the discount

• Explanation of the chosen method

• A summary of how the company’s unique characteristics support the adjustment

In Canada, credible and well-supported documentation ensures the discount is accepted by stakeholders, regulators, or courts. It also helps avoid challenges or disputes.

At Aspen Valuation, we provide expert valuation services tailored to Canadian businesses and tax requirements. Reach out to discuss how we can help you establish a credible marketability discount for your situation.