Dear All:
I am so confused about these terms. Are they the same meaning? control premium is the cost to the buyer or the seller? how about the discount lack of control , is it the benefit to the buyer?
Thank you so much for your time.
best regards
Control premium is the extra amount a buyer has to pay (compared to buying a minority stake), if they are buying a controlling stake.
DLOC is the discount a buyer gets for buying a minority stake (compared to buying a controlling stake) to compensate them for the fact they don’t have control of the company.
DLOC = 1 - (1 / (1 + control premium))
ie if the control premium is 25 percent, the DLOC is 20 percent.
You can also think like this.
Buyer-1 pays extra premium (25%) to control an $100,000 worth company. So the equity value to Buyer-1 is $125,000.
It is not the same value to start with for Buyer-2, who is a minority shareholder. It should be less, so 20% discount on $125,000 = $100,000. If he owns 10% stake, you know the remaining calculations…
Discount is the deduction of the control premium, since the control premium was already included in the equity value.