When valuing a professional service business for equitable distribution in a New York divorce, two key valuation discounts often come into play:
Discount for Lack of Marketability (DLOM): Applied when a business interest is illiquid and cannot be easily sold.
Minority Discount (Lack of Control): Applied when a spouse owns a non-controlling interest in the business.
New York courts do not apply these discounts automatically and instead analyze them on a case-by-case basis. Below is a deep dive into these concepts, supported by NYS case law.
Discount for Lack of Marketability (DLOM)
DLOM reflects the reduced value of an ownership interest due to the difficulty of selling it in the marketplace. Professional service businesses (law firms, medical practices, accounting firms) often have restrictions on ownership (e.g., must be a licensed professional), making them highly illiquid—a key reason for applying DLOM.
New York Case Law on DLOM
Case: Beway v. Beway, 215 A.D.2d 575 (2d Dep’t 1995)
Case: Giaimo v. Vitale, 101 A.D.3d 523 (1st Dep’t 2012)
Factors Affecting DLOM in NY Divorce Cases
Industry & Marketability: Professional firms have ownership restrictions and may lack a ready market, supporting DLOM.
Restrictions on Sale: Many partnerships do not allow non-professionals to own shares, making the interest harder to sell.
Time to Sell: If selling an interest would take months or years, courts may apply a higher DLOM.
Typical DLOM Percentages for Professional Firms
Medical Practices – 20% to 35% (high restrictions on ownership transfer)
Law Firms – 25% to 40% (often require partner vote for new owners)
Accounting Firms – 20% to 30% (varies based on client retention risk)
Courts may reject excessive DLOMs if they find the valuation expert’s assumptions too speculative.
Minority Discount (Lack of Control Discount)
A minority discount accounts for the reduced value of a non-controlling interest in a business because the owner cannot influence operations, salaries, or distributions.
New York Case Law on Minority Discounts
Case: Ferolito v. AriZona Beverages USA, LLC, 119 A.D.3d 642 (2d Dep’t 2014)
Case: Windsor v. Windsor, 295 A.D.2d 233 (1st Dep’t 2002)
Factors Affecting Minority Discounts
% Ownership: If the spouse owns less than 50%, courts may allow a minority discount.
Voting Rights: If the spouse cannot influence major business decisions, a discount is more likely.
Profit Distributions: If the business retains profits without owner approval, courts may consider a discount.
Typical Minority Discounts for Professional Practices
Medical or Law Firms (Non-Equity Partner) – 15% to 30%
Minority Ownership in a CPA Firm – 10% to 25%
Small LLC or Partnership Interests – 15% to 35%
Courts often apply lower minority discounts in professional firms because owners still benefit from the business’s goodwill and earnings.
NY Courts’ Approach: When Are DLOM & Minority Discounts Applied?
New York courts do not automatically apply these discounts and instead evaluate the business’s control, marketability, and ownership structure.
Full Ownership (No Discount): If the spouse owns 100% of a firm, no minority discount applies.
Restricted Ownership (Higher DLOM): If ownership is restricted (e.g., only licensed professionals can buy in), a higher DLOM may be used.
Passive Interest (Higher Minority Discount): If the spouse cannot control business operations, a minority discount is more likely.
Example Applications in NYS Divorce Cases
Scenario 1: Small Law Firm, Sole Practitioner
Spouse owns 100% of the firm (solo law practice).
No minority discount applies since they control the firm.
A DLOM of ~30% may apply due to lack of marketability (hard to sell to non-lawyers).
Result: Business valued at $500,000, reduced by 30% DLOM → Final Value = $350,000
Scenario 2: CPA Firm, 30% Ownership
Spouse owns 30% of an accounting firm with two other partners.
Spouse has no decision-making control (minority interest).
A 15-20% minority discount may apply.
A 20% DLOM may apply if partnership transfer restrictions exist.
Result:
Initial Value = $400,000
Applying 15% Minority Discount = $340,000
Applying 20% DLOM = $272,000
Final Valuation for Divorce = $272,000
Scenario 3: Medical Practice Partnership (50/50 Ownership)
Spouse is a 50% owner in a medical practice.
The practice cannot be sold to non-doctors → Supports a higher DLOM.
Spouse shares control → No minority discount applies.
Result: DLOM likely applied (~25%-30%) but no minority discount due to shared control.
Key Takeaways for NY Divorce Cases
DLOM applies when an ownership interest is illiquid, typically between 20% to 40% in professional firms.
Minority discounts apply when a spouse lacks control, typically between 10% to 30%, but are scrutinized by courts.
New York courts do not automatically accept these discounts and require expert valuation analysis.
Excessive discounts may be challenged if they unfairly reduce the marital asset value.
Professional firms with ownership restrictions justify higher DLOMs.
