Explain and assess how control and marketability discounts and premiums change the value of a private company
The idea
Discounts and premiums adjust a base value to the particular interest being valued. 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). A discount for lack of marketability reflects the absence of a ready market for the shares and is larger for bigger restrictions and longer expected holding periods. Discounts compound multiplicatively, each applied to the value left after the other, so the total discount is D = 1 − (1 − DLOC) × (1 − DLOM). Whether each applies depends on the base: a value from guideline public company multiples is already on a minority, marketable basis, so no DLOC is needed for a minority stake. The trap is adding the two discounts rather than compounding them.
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