I’m confused by both premium and discount associated with the Lack of Control. When do they apply and when do they not?
Could anyone please help?
When using market approach, since it’s rare to come across identical transactions, certain adjustmentsare necessary to make sure the comparison is apples to apples.
When using the Guideline Public Company Method (GPCM), because the pricing multiples are derived from transactions of shares of public companies, control premium applies when valuing purchases of the entire company.
On the otherhand, when using the Guideline Transactions Method (GTM) that is based on the transactions of entire companies, if valuing a partial purchase, then the discount for a lack of control would apply.
The idea of the premium is reflecting the reasoning that there’s a big difference between you owning 49% of voting shares, and the other guy owning 51% (just assume 2 owners here). When you control 49% of votes, you’re at the mercy of what the 51%er wants to do. So there’s extra value in having control. We call this control premium. If 1% of the company is valued at 1, 49% is 49. But someone might pay extra for 51% - say 55$. Those extra 4$ are for the ability to control decisions. (e: in reality it’s probably not so black-and-white, there’s levels of control etc)
So when you’re trying to value a private company keep this in mind. If you’re looking at prices that other companies were fully purchased at (transactions method), then you don’t have to worry about adding a control premium. Why? Because those people bought 100% of the company - that price would include the control premium.
If you’re looking at smaller transactions - without control - then you have to add it in. The 25% buyer wouldn’t be adding a control premium. Hell, if the price is based on a control valuation, he will demand a discount for lack of control!