The impact of control on the discount for lack of marketability

Abstract

Valuations of private companies can be required for tax purposes, merger and acquisition transactions, divorce settlements, partnership restructurings, etc. Very often, these valuations take place in litigious circumstances.

The process for valuing private companies is deceptively complex. This is notably because there is no consensus on the size and determinants of two important valuation discounts that may need to be applied: the discount for lack of control (DLOC) and the discount for lack of marketability (DLOM).

We have constructed a unique dataset based on court decisions that decide on a DLOM and identify its determinants. Ultimately, this dataset has allowed us to examine whether the level of control attached to the valuation subject has a significant effect on the DLOM.

This paper finds that control, while normally attributed solely to the DLOC, also impacts marketability. This hitherto overlooked determinant has a statistically significant impact of 8% on the DLOM. Contrary to conventional wisdom, control applies not once but twice to a private company’s value: as the primary driver of the DLOC and again as a key determinant of the DLOM.