{"id":21876,"date":"2021-09-30T15:04:40","date_gmt":"2021-09-30T15:04:40","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=21876"},"modified":"2026-03-27T06:52:38","modified_gmt":"2026-03-27T06:52:38","slug":"valuation-discounts-and-premiums","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equity-valuation\/valuation-discounts-and-premiums\/","title":{"rendered":"Valuation Discounts and Premiums"},"content":{"rendered":"<p><script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"How do you calculate the combined discount for lack of control and lack of marketability?\",\n    \"text\": \"For a company with a discount for lack of control of 8% and a discount for lack of marketability of 9%, the total discount is closest to:\\n\\nA. 16.28%\\nB. 17%\\nC. 17.14%\",\n    \"answerCount\": 3,\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"A. 16.28%\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"B. 17%\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"C. 17.14%\"\n      }\n    ],\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"A. 16.28%\",\n      \"commentary\": \"When combining valuation discounts, they are applied multiplicatively rather than additively. The total discount is calculated as 1 \u2212 (1 \u2212 0.08)(1 \u2212 0.09) = 1 \u2212 (0.92 \u00d7 0.91) = 0.1628, or 16.28%. Simply adding the two discounts would overstate the total reduction in value.\",\n      \"url\": \"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equity-valuation\/valuation-discounts-and-premiums\/\"\n    },\n    \"author\": {\n      \"@type\": \"Organization\",\n      \"name\": \"AnalystPrep\"\n    }\n  }\n}\n<\/script><\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/LLxHIyf6cUs\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Public company valuations are based on liquid share exchange, while private company valuations adjust for control and limited share exchange. The highest value comes from a strategic buyer with synergy potential and a willingness to assume execution risk. Financial buyers may pay a premium for control but may lack synergy or expertise. Marketable non-controlling equity matches public market prices. Discounts for control and marketability are discussed further, with variations based on context, data comparability, shareholding size, legal factors, and more. Timing matters, as private companies eyeing IPOs or strategic sales have lower discounts, while those without dividends or liquidity prospects have higher ones. Control and\/or marketability adjustments are often included in valuations of interests in private companies.<\/p>\n<div style=\"text-align: center; margin: 25px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 10px 18px; border: 2px solid #1a73e8; border-radius: 999px; color: #1a73e8; text-decoration: none; font-weight: 500; background-color: #f5f9ff; white-space: nowrap;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Analyze valuation discounts with a free trial <\/a><\/div>\n<h2>Discount For Lack of Control (DLOC)<\/h2>\n<p>The discount for lack of control is a reduction in a company&#8217;s share value as a result of a shareholder being unable to exercise his or her control over the company. This is necessary for valuing non-controlling equity interests in private companies if the value of total equity was developed on a controlling interest basis.<\/p>\n<p>For a private company, the discount is higher when the company has not paid dividends and has no probability of going public. On the other hand, the discount is lower when a private company is seeking an IPO and when it is a strategic sale.<\/p>\n<p>$$\\text{DLOC}=1-\\bigg[\\frac{1}{1+\\text{Control premium}}\\bigg]$$<\/p>\n<h4>Example: DLOC<\/h4>\n<p>If the control premium is 15%, then:<\/p>\n<p>$$\\text{DLOC}=1-\\bigg[\\frac{1}{1.15}\\bigg]=13\\%$$<\/p>\n<p>The application of DLOC varies:<\/p>\n<ul>\n<li>If the investor values the company from a non-controlling perspective, so the DLOC should be applied.<\/li>\n<li>If the investor values the company from a controlling perspective, then a DLOC should not be applied.<\/li>\n<\/ul>\n<h2>Lack of Marketability Discounts (DLOM)<\/h2>\n<p>A discount for lack of marketability is the percentage deducted from the value of an ownership interest to reflect the relative absence of a ready market for a company&#8217;s shares compared with publicly traded companies. It is applied to the valuation of noncontrolling equity interests in private companies.<\/p>\n<p>Factors that Increase DLOM<\/p>\n<ul>\n<li>Restriction on the sale of shares.<\/li>\n<li>Restrictions on transferability.<\/li>\n<li>Higher risk.<\/li>\n<li>Greater uncertainty of value.<\/li>\n<li>Concentration of ownership.<\/li>\n<\/ul>\n<p>Factors that Decrease DLOM<\/p>\n<ul>\n<li>High prospects for liquidity.<\/li>\n<li>Payments of dividends.<\/li>\n<li>Large pool of potential buyers.<\/li>\n<li>Duration of asset.<\/li>\n<\/ul>\n<p>The value of equity interest is then calculated as:<\/p>\n<p>$$\\begin{align*}\\text{Estimated value of equity interest}&amp;=\\text{Pro rata value of equity interest}\\\\&amp; \\times(1-\\text{Control discount})\\\\&amp;\\times(1-\\text{Marketability discount})\\end{align*}$$<\/p>\n<h4>Example: Calculating the Estimated Value of Equity Interest<\/h4>\n<p>Given a DLOC of 15% and DLOM of 11%:<\/p>\n<p>$$\\begin{align*}\\text{Total discount}&amp;=1-[(1-\\text{DLOC})(1-\\text{DLOM})]\\\\&amp;=1-[(1-0.15)(1-0.11)] \\\\&amp;= 0.243 \\\\&amp;= 24.3\\%\\end{align*}$$<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>For a company with a discount for lack control is 8% and a discount for lack of marketability of 9%, the total discount is <em>closest to:<\/em><\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li>16.28%.<\/li>\n<li>17%.<\/li>\n<li>17.14%<\/li>\n<\/ol>\n<h3>Solution<\/h3>\n<p><strong>The correct answer is A.<\/strong><\/p>\n<p>$$\\begin{align*}\\text{Total discount}&amp;=1-(1-0.08)(1-0.09)\\\\&amp;=0.1628\\\\&amp;=16.28\\%\\end{align*}$$<\/p>\n<\/blockquote>\n<p>Reading 27: Private Company Valuation<\/p>\n<p><em>LOS 27 (f) Explain and evaluate the effects on private company valuations of discounts and premiums based on control and marketability.<\/em><\/p>\n<div style=\"text-align: center; margin: 40px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 20px; border-radius: 999px; background-color: #1a73e8; color: #ffffff; text-decoration: none; font-weight: 600;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Start Free Trial \u2192 <\/a><\/p>\n<p style=\"font-size: 15px; margin-top: 12px; color: #555;\">Practice DLOC, DLOM, and private company valuation questions for CFA Level II with AnalystPrep.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Public company valuations are based on liquid share exchange, while private company valuations adjust for control and limited share exchange. The highest value comes from a strategic buyer with synergy potential and a willingness to assume execution risk. Financial buyers&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,401],"tags":[216,402],"class_list":["post-21876","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-equity-valuation","tag-cfa-level-2","tag-equity-valuation","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Valuation Discounts &amp; Premiums | CFA Level 2<\/title>\n<meta name=\"description\" content=\"Learn valuation discounts and premiums, including DLOM and DLOC, control premiums, and their impact on equity valuation in CFA Level 2.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link 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