Discounts for Lack of Marketability (DLOM)

Liquidity refers to the ease with which an asset or security can

be converted into ready cash without affecting its market price.
Since the stock of private company is less liquid compared to
publicly traded company, this lack of liquidity can create
complications when valuing shares of unlisted private entity
using Comparable Companies Multiple Methodologies (CCM)
under market approach.
Discounts for lack of marketability (DLOM) refer to the method
used to calculate the value of closely held and restricted shares
of comparable companies. The premise behind DLOM is that a
valuation discount exists between a stock that is publicly traded
hence marketable, and unlisted company stock, which often
has a little marketability. In other words, a rational investor
would pay less for a closely-held (private) share of stock than
that same investor would pay for a publicly-traded, fully liquid
security.
Generally, it’s valuers call to apply level of discount (it ranges
between 15%-25%) which sometimes make the valuation
subjective in nature if not backed by statistical numbers or
empirical research on it. It means everything else remains the
same, a private company stock would be priced 15% to 25%
less than the comparable publicly traded company because of
lack of marketability. To reduce the biasness and increase
transparency, Chaffe model is used to quantify the discount for
lack of marketability so as to eliminate subjectivity.
The Chaffe Approach
It is a Discounts for Lack of Marketability option pricing
study in which the cost to purchase a put option is related to the
DLOM. In Chaffe's estimation, if a person holds restricted or
non-marketable stock and purchases an option to sell those
shares at the free market price, the holder has purchased
marketability for those shares. The price of the put is the
discount for lack of marketability. This model relied on the
Black Scholes Option Pricing Model for a put option to
determine the cost of the put option, and considered the
DLOM as the cost of the put option divided by the market price.
According to Chaffe model, this approach should be considered
the theoretical lower bound on an enterprise's DLOM, since a
put option pricing formula does not take into account early
exercise.  
The Model

P = X e-rt * N(-d2) - S0e-qt * N(-d1)

Where:
S0 = Total Equity Value
X = Equity Breakpoint Value
q = continuously compounded dividend yield
t = time to expiration (% of year)
σ = Volatility
r = risk-free rate
N(.) = Standard normal cumulative distribution function