Certified Valuation Analyst (CVA) Practice Exam

What does DLOM represent in valuation analysis?

1. Discount for Loss of Marketability

2. Discount for Level of Ownership Misrepresentation

3. Discount for Lack of Market Information

4. Discount for Loss of Control over Management

The correct answer is: Discount for Loss of Marketability

DLOM stands for Discount for Loss of Marketability. This concept is crucial in valuation analysis, particularly when assessing closely held companies or illiquid assets. When valuing an asset that cannot easily be sold or that has restrictions on its transferability, DLOM reflects the decrease in value due to the difficulty of converting that asset into cash. Essentially, it adjusts the estimated value to account for the fact that without a ready market, the asset may not fetch its full worth. Marketability is a key factor in determining an asset's value. DLOM quantifies the extent to which the lack of a liquid market impacts the price a buyer might be willing to pay for an interest in the asset. By acknowledging this discount, analysts can provide a more accurate representation of an asset's value, which is essential for their clients and other stakeholders. Understanding the implications of DLOM is vital for valuation analysts because it directly affects investment decisions and strategic planning for business owners or investors looking to buy or sell interests in private companies.