Control premium

The extra paid for a controlling interest over the value of a minority stake, for the power to direct the business. Multiples from acquisitions of whole companies already include it.

Where you will meet it

Control premium appears in 4 learning outcomes on the CFA syllabus. A few of them:

• Explain and assess how control and marketability discounts and premiums change the value of a private company
  CFA Level II · Equities

  “A control premium reflects the ability to direct the business, and the matching discount for lack of control is DLOC = 1 − 1 ÷ (1 + control premium).”

• Apply valuation methods to companies undergoing corporate restructuring and explain the values that result
  CFA Level II · Corporate Finance

  “Comparable company analysis applies peers' trading multiples, such as EV/EBITDA, to the target, giving a value without a control premium.”

• Value a private firm using methods based on the market and set out the pros and cons of each method
  CFA Level II · Equities

  “The guideline public company method applies multiples of similar listed companies, adjusted for differences in size, growth and risk, and adds a control premium when a controlling interest is valued; the data are liquid and current, but comparability is often weak.”

• Assess how a company divests, whether through a sale or a spin off
  CFA Level II · Corporate Finance

  “The traps are comparing gross proceeds with value, and assuming a spin-off brings in cash or a control premium.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with C · Glossary