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Business Valuation - What is the "Discount for Lack of Control" or DLOC?

A business valuation is often needed on a noncontrolling ownership interest in closely held companies. Depending on the valuation approaches and methods applied, this analysis may initially arrive at a valuation of the controlling ownership interest.

Controlling owners have the ability to make major business decisions, while a noncontrolling owner does not. As such, a noncontrolling interest will almost always be considered to be worth less than a controlling ownership interest.

For example, controlling owners generally have the ability to do the following:

1. Select the management of the company

2. Determine management compensation

3. Change the company's business model

4. Acquire or liquidate company assets

5. Borrow funds on behalf of the company

6. Liquidate, dissolve, sell or recapitalize the company

7. Declare and pay dividends

DLOC Quantification

Arriving at the DLOC typically will require an analysis of control premiums in the public securities markets. This provides evidence of the control premium paid over a noncontrolling stake in these companies. For example, if a stock is trading at $20 a share and the company is subsequently announced it will be acquired raising the stock price to $25 a share, that $5 increase would indicate the control premium. This would result in a 25% premium (i.e., ($25 - $20) / $20) in this example.

The implied DLOC can then be calculated as follows:

DLOC = 1 - [1 / (1 + Control Premium)].

In the example above, this would result in a DLOC of 20% calculated as 1 - (1 / 1.25).

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Disclaimer: The information contained in this article is for general guidance only. The information presented should not be acted upon without the advice and guidance of a professional tax, legal, or financial adviser who is familiar with all the relevant facts.

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