A valuation method usually produces the value of a whole business on a particular basis. When the interest being valued is a minority stake, a controlling stake or shares that cannot easily be sold, adjustments are needed. The three most important are the discount for lack of marketability (DLOM), the discount for lack of control (DLOC) and the control premium. They often move value by 10% to 40% or more, so they deserve as much rigour as the underlying valuation.
Discount for Lack of Marketability (DLOM)
DLOM reflects the fact that shares in a private company cannot be sold quickly and cheaply in the way listed shares can. Common evidence and models include:
- Restricted stock studies: price differences between restricted and freely traded shares of the same company
- Pre-IPO studies: private transactions shortly before an IPO compared with the IPO price
- Option-based models: the Chaffe (European put), Finnerty and Longstaff (lookback) models, driven by volatility and the expected holding period
- Quantitative Marketability Discount Model (QMDM): based on expected holding period, growth and required return
Discount for Lack of Control (DLOC)
DLOC reflects the inability of a minority shareholder to direct strategy, dividends, management or a sale of the company. It is usually derived from the control premium: DLOC = 1 – 1 ÷ (1 + control premium). For example, a 30% control premium implies a DLOC of about 23%.
Control Premium
A control premium is the amount a buyer will pay above the minority, marketable value to obtain control, reflecting expected synergies and the power to change how the business is run. It is benchmarked against premiums paid in acquisitions of listed companies, adjusted for industry, deal type and whether the benefits of control are realistic for the subject company.
Applying Discounts and Premiums Correctly
- Match the level of value: DCF and guideline public company multiples typically give a marketable, minority-level value. Precedent transactions usually reflect control.
- Avoid double counting: do not apply a DLOC to a value that is already on a minority basis.
- Follow the reporting framework: under IFRS 13, premiums or discounts apply only where market participants would take them into account for the unit of account, and blockage discounts are not permitted.
- Consider the specific rights attached to the shares: shareholder agreements, put and drag-along rights, dividend history and exit horizon.
When These Adjustments Matter
Valuations of private company shares for tax, estate planning, shareholder disputes, fund reporting, share-based payments and transactions in minority or controlling stakes.
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Valtech Valuation is an independent valuation and transaction advisory firm with offices in Hong Kong and Singapore. Public companies, private businesses and multinational corporations rely on our valuations for financial reporting, transactions, fundraising and disputes. Our clients range from Fortune 500 companies, listed groups and US-listed firms to private equity funds, family offices and high-growth startups, across Hong Kong, Mainland China, Singapore, Southeast Asia, the Middle East and the United States.
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