The Role of Discounts and Premiums in Business Valuation

Business valuation often requires adjusting the base value of a company to reflect specific circumstances, such as ownership level and marketability. These adjustments, known as discounts and premiums play an important role in business valuation and can significantly impact the final valuation outcome. This article explores the key types of discounts and premiums and when they are applied.

What Are Discounts and Premiums and What Role Do They Play in Business Valuation?

Discounts

Reductions in the base valuation to account for factors that diminish value.

Premiums

Additions to the base valuation to reflect factors that increase value.

These adjustments ensure that the valuation reflects real-world conditions and market dynamics.

Minority Discounts and Control Premiums

A Minority Discount reflects the reduced value of a non-controlling ownership interest. Minority shareholders typically have limited influence over key business decisions, making their shares less attractive to potential buyers.

Conversely, a Control Premium is added when an ownership interest conveys significant control over the company. This premium reflects the added value of decision-making power and strategic influence.

Marketability Discounts

A Lack of Marketability Discount (LOMD) accounts for the reduced liquidity of private company shares. Unlike publicly traded companies, where shares can be sold quickly, private company shares are harder to sell, warranting a discount to compensate for this reduced marketability.

Practical Application

Valuation experts use empirical data, industry benchmarks, and historical transaction analyses to determine appropriate discount and premium levels. These adjustments play a crucial role in ensuring a fair and accurate valuation.

If you’re navigating complex ownership or considering selling shares of your business, Arbiter Valuation can help you understand and apply the right discounts and premiums to reflect your business’s true value. Contact us to learn more.

Learn more about how intangible assets factor into business valuation in our next blog post: Navigating the Complexities of Valuing Intangible Assets.