Posted in Finance, Accounting and Economics Terms, Total Reads: 983
Definition: Discount for Lack of Control
While determining the economic value of an owner’s interest in a business, certain discounts and premiums are taken into consideration which affects the value of such interest depending on its “level of value”. The interest can be a minority interest (less than 50% of the company’s equity) or a controlling one (more than 50% of the company’s equity).
Discount for lack of control is one such discount used in the valuation of a controlling interest reducing the pro rata share value of the entire business in order to reflect the absence of power or control. The level power or control of an interest in a business is determined by its ability to exercise controlling rights which include but are not limited to electing directors and appointing management, determining management compensation and perquisites, paying dividends, making acquisitions etc.
Example: A person having 100% ownership will have a better value of interest than a person owning, say, 51% as the latter, even after being majority shareholder, will be at the mercy of other owners specially in situations requiring super majority vote.