Discounts and Premiums: DLOM, DLOC and Control Premium
Know what your starting value already contains, so nothing is added twice or left out.
The same company can be worth different amounts per share depending on the size and liquidity of the stake. A 51% block carries the power to appoint the board and set dividends; a 5% holding in an unlisted family company carries neither, and may take years to sell. Valuers capture this with a control premium, a discount for lack of control (DLOC) and a discount for lack of marketability (DLOM).
ICAI Valuation Standard 103 treats these as the most common adjustments under the market approach. The skill is knowing what your starting value already contains, so that nothing is added twice or left out.
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What Each Starting Value Already Contains
Comparable companies (CCM)
Control?
No: listed peers' prices are minority prices (VS 103 para 45)
Marketable?
Yes
Adjustment for a minority stake in an unlisted company
DLOM only
Comparable transactions (CTM)
Control?
Usually yes: deal prices include a control premium (para 30)
Marketable?
Varies with the deal
Adjustment for a minority stake in an unlisted company
DLOC, then DLOM
DCF
Control?
Yes: cash flows reflect control (para 59)
Marketable?
Depends on the inputs, chiefly the discount rate
Adjustment for a minority stake in an unlisted company
DLOC, and DLOM by judgement (para 60)
Quoted price of the subject
Control?
No
Marketable?
Yes
Adjustment for a minority stake in an unlisted company
None for a minority; control premium only for a controlling block
| Starting value | Control? | Marketable? | Adjustment for a minority stake in an unlisted company |
|---|---|---|---|
| Comparable companies (CCM) | No: listed peers' prices are minority prices (VS 103 para 45) | Yes | DLOM only |
| Comparable transactions (CTM) | Usually yes: deal prices include a control premium (para 30) | Varies with the deal | DLOC, then DLOM |
| DCF | Yes: cash flows reflect control (para 59) | Depends on the inputs, chiefly the discount rate | DLOC, and DLOM by judgement (para 60) |
| Quoted price of the subject | No | Yes | None for a minority; control premium only for a controlling block |
The Three Adjustments
- Control premium
- The amount a buyer will pay over the market price of a listed company to get control, for synergies and the power to direct operating, financial and governance policy (VS 103 paras 42-44).
- DLOC
- The mirror image of the control premium, applied when valuing a non-controlling stake from a control-basis value.
- DLOM
- Reflects that an asset needing a long marketing period, or under lock-in or regulatory restriction, is worth less than a freely traded one (para 38). Only restrictions inherent in the asset count; restrictions specific to one owner generally do not (para 39).
Worked Example: From a Peer-Multiple Value to a Minority Stake
Illustrative. CCM gives an unlisted Chennai engineering company an equity value of ₹500 crore on a minority, marketable basis. Control premium 25%; DLOM 20%.
100% controlling interest
Working
500 × 1.25
₹ crore
625
10% minority stake
Working
500 × (1 − 0.20) × 10%
₹ crore
40
Same 10% stake, wrongly started from control value
Working
625 × (1 − 0.20) × 10%
₹ crore
50 (overstated)
| Interest being valued | Working | ₹ crore |
|---|---|---|
| 100% controlling interest | 500 × 1.25 | 625 |
| 10% minority stake | 500 × (1 − 0.20) × 10% | 40 |
| Same 10% stake, wrongly started from control value | 625 × (1 − 0.20) × 10% | 50 (overstated) |
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A control premium and a DLOC are linked: DLOC = 1 − 1 ÷ (1 + control premium). A 25% premium therefore corresponds to a 20% DLOC, not 25%. Discounts are applied one after another, not added: a 20% DLOC and a 20% DLOM give a combined discount of 36% (1 − 0.8 × 0.8), not 40%.
Setting the DLOM
VS 103 (para 41) lists the factors; the size of the discount is the valuer's judgement.
- check_circleSize and nature of the holding, history of past transactions in the shares, and exit rights such as tag-along or a put.
- check_circleTime and cost of marketing the stake or of a public offer, and restrictions on transfer in the articles or a shareholders' agreement.
- check_circleLack of, or limits on, access to information.
- check_circleValuers commonly support the figure with restricted-stock and pre-IPO transaction studies or put-option models, and state the basis in the report.
How the Valuation Examination Tests This
Expect a case where one value is given and the question asks for the value of a different interest, plus concept questions on which method already includes control. The traps: adding a control premium to a CTM or DCF value, applying DLOM to a listed share, converting a premium to a discount at the same percentage, adding discounts instead of compounding them, and discounting for a restriction that binds only the current owner.
FAQs
What is the difference between DLOM and DLOC?expand_more
DLOC reflects the lack of power to direct the company. DLOM reflects how hard and slow the stake is to sell. A minority stake in an unlisted company can carry both.
Is a control premium added to DCF value?expand_more
No. ICAI VS 103 says DCF cash flows already reflect control, so the DCF value is not grossed up for a control premium.
Does a comparable transaction multiple include a control premium?expand_more
Generally yes, because acquisition prices usually include one, except where the deal itself was for a minority stake.
How do you convert a control premium into a minority discount?expand_more
DLOC = 1 − 1 ÷ (1 + control premium). A 25% control premium gives a 20% discount for lack of control.
Next steps
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- DCF valuationarrow_forward
- Preparationarrow_forward
- SFA mock testarrow_forward
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