Last time we learned how control increases value through premiums. This time let's explore the flip side: how lack of marketability decreases value.
Marketability refers to how easily and quickly you can sell your ownership interest for cash.
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Which is more marketable — your home or a stock, and why?
Public company stocks are highly marketable - you can sell them instantly during market hours at known prices.
But what about owning 25% of a private family restaurant? There's no stock exchange for that!
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How long might it take to find a buyer?
This lack of marketability creates risk and inconvenience for investors. They might need cash urgently but be stuck waiting months or years to find a buyer.
Rational investors demand compensation for this illiquidity through lower purchase prices.
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Would you pay the same for something hard to resell?
This leads to marketability discounts - reductions in value applied to illiquid ownership interests.
If a controlling interest is worth $100,000, but takes 18 months to sell, a buyer might only pay $75,000 due to the liquidity risk.
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What's the discount percentage in this example?
Several factors affect discount size. Larger discounts apply when the business is smaller, less profitable, in a declining industry, or has operational problems.
Smaller discounts apply for stable, profitable businesses in growing industries with good management.
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Which business profile would likely get the smaller discount?
The size of ownership also matters. A 2% minority stake in a private company faces higher discounts than a 49% stake.
