Page 53 - 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 (DLOC)
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.

It is difficult to measure the disadvantage from a lack of control, so we ‘back’ it out of the control premium.

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

Control premiums is calculated from public data
When are control premiums or discounts are appropriate? on prior public company acquisitions.

Not only multiples but the use of DCF methods (FCF/CCM) could also require adjustments, depending on whether the
estimated and subject cash flows were on a controlling or noncontrolling interest basis.