Discount for lack of marketability

Definition

The price cut a business takes for being hard to sell quickly.

Why It Matters

A listed company's shares change hands in a second and a private business takes months to sell, if it sells at all, and every buyer prices that difference in. It is most of the reason a small business trades at three or four times its earnings while a public company in the same trade trades at several times more. A seller comparing the two is comparing a liquid asset to an illiquid one without saying so. The practical use is defensive. When a seller quotes a multiple from public markets, or from a private deal ten times the size, the gap between that number and your offer is not an insult. It is the discount every buyer of an unlisted business applies to every unlisted business. It narrows where the business is genuinely easy to hand over: clean books a lender will accept, a manager already running the day, and no customer who asks for the owner by name.

In numbers: On $1.5M of SDE, a 6x asking price is $9M and a 4x offer is $6M, and the $3M between them is what the argument about marketability is worth.