Page 55 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 33.k: Explain and evaluate the effects on READING 33: PRIVATE COMPANYVALUATION
private company valuations of discounts and
premiums based on control and marketability.
MODULE 33.4: VALUATION DISCOUNTS

The Discount for Lack of Control
Minority shareholders are at a disadvantage relative to controlling shareholders because they have less power to select the directors
and management. Controlling shareholders can also enjoy excessive compensation and other perquisites to the detriment of minority
shareholders. However, firms that will experience an IPO or sale are less likely to pursue actions that damage minority shareholders.

Because it is difficult to measure the disadvantage from a lack of control, the discount is usually backed out of the control premium.

For example, if the control premium is 25%, the
DLOC is 20%: example, if the control premium
is 25%, the DLOC is 20%:

To calculate control premiums, data from the acquisitions of public companies are typically used. The table below summarizes
when control premiums or discounts are appropriate.

Scenario 2:
Guideline Transactions Method is used for valuing a
noncontrolling interest. Recall that in the GTM, the
comparable price multiple data is for the sale of entire
firms where control is acquired.

Scenario 3:
When the GPCM is used. Recall that in the GPCM, the
comparable price multiple data is from noncontrolling
interests.

The use of discounted cash flow methods such as the FCF and CCM could also require adjustments, depending on whether the
estimated and subject cash flows were on a controlling or noncontrolling interest basis.