Every private-company valuation adjustment in this module answers exactly one of two questions: whose cash flows can this interest direct, and can the holder convert this interest to cash on demand? Stack the possible answers into a ladder, from most to least valuable per dollar of underlying earnings:
| Level | Can direct the cash flows? | Ready market? | What it is |
|---|---|---|---|
| Controlling, marketable | Yes | Yes | Rare in practice, a control stake that also has a ready buyer, e.g., an actual announced public-company acquisition |
| Marketable minority | No | Yes | A public trading price / guideline-public-company multiple: what M3.06's comps machinery hands you directly |
| Nonmarketable controlling | Yes | No | A private company's controlling stake, no forced buyer, no public market |
| Nonmarketable minority | No | No | A private company's minority stake, cannot direct cash flows and cannot force a sale or a dividend; the worst-off position, and correctly the deepest discount |
Which adjustment applies at each level of value?
The two adjustments this module teaches move independently, in different directions, answering different questions. A control premium (or its reciprocal, a discount for lack of control, DLOC) moves you between "marketable minority" and "controlling", a question of whose cash flows you can direct. A discount for lack of marketability (DLOM) moves you down from "marketable" to "nonmarketable", a question of whether you can convert the stake to cash on your own timeline. Getting a private-company valuation right requires identifying exactly which corner of this table you have been asked to value, applying only the adjustment(s) that corner actually requires, in the right order, exactly once each. The most common failure in the entire discipline (flagged again in Common Mistakes and drilled in Practice P16) is stacking a DLOM on top of a value that was already built from private-transaction comparables (which themselves already embed a market's illiquidity discount in the price paid), silently double-counting the same adjustment under two different names.
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Control premium and DLOC
E11.02 measured a control premium off a public target's unaffected trading price in an announced deal, empirically often in the 20–40% range. A private company has no trading price at all, unaffected or otherwise, so the premium instead applies multiplicatively to a marketable-minority value you have already built (from guideline public comparables, per M3.06), converting "what a diversified portfolio investor would pay for a small, powerless slice" into "what a strategic buyer who can redirect 100% of the cash flows and strip out redundant costs would pay for the whole thing."
The reverse move (DLOC) converts a value built on a controlling assumption (say, a DCF that presumes the buyer sets capex, compensation, and dividend policy freely) back down to what a powerless minority holder's pro-rata slice is genuinely worth. The relationship is a reciprocal, not a subtraction, and this is the single most common numerical error in the whole discipline:
DLOC = 1 − 1 / (1 + control premium)
What happens if you subtract the control premium?
A 30% control premium implies a DLOC of roughly 23.08%, not 30%, worked exactly in Worked Example 6 and drilled again in Practice P12. Subtracting the control-premium percentage directly, as if the two moves were symmetric, applies a 30% discount where 23.08% is correct, so it overstates the discount and understates what the minority holder's stake is worth. On a controlling value of 100 the correct minority figure is 76.92 and the naive one is 70.00, a shortfall of 6.92, or 9.00% of the right answer, which is the wrong direction to be wrong in when the number is going into a family settlement or a tax filing. Check it by hand every time you use it.