Premiums and Discounts: Control Premiums, Minority Discounts, and Illiquidity Adjustments

Introduction: The Art and Arithmetic Behind Price Gaps

Premiums and discounts are not anomalies. They are deliberate pricing tools used to bridge differences in control, liquidity, and marketability. In M&A and valuation work, understanding how and when to apply control premiums, minority discounts, and illiquidity adjustments can be the difference between a deal that closes and one that collapses.

Control Premium: Paying for the Steering Wheel

A control premium reflects the additional value a buyer is willing to pay for the ability to direct a company’s operations, strategy, and capital allocation.

We often see this in public-to-private deals. A controlling interest commands a premium of 20 to 40 percent over the market price. In a mid-market buyout I led in 2022, we negotiated a 28 percent control premium justified by:

• Ability to rationalize SG&A
• Unlocking underutilized assets
• Refinancing inefficient debt

Control premiums must be grounded in modeled improvements. A control premium with no roadmap is just overpayment.

Minority Discount: The Cost of Limited Influence

Minority interests are less valuable due to lack of control. Buyers often apply a discount of 10 to 30 percent depending on governance rights, liquidity, and dividend history.

We applied a 25 percent minority discount in a Series A secondary where the seller had no board seat, no tag-along rights, and the company had paused dividends. The discount was not a reflection of performance, but of position.

Illiquidity Discount: Valuing the Locked-In Investor

Private company shares are illiquid. This lack of a ready market reduces value. In valuation models, an illiquidity discount of 10 to 35 percent is common.

One biotech investor asked why her preferred shares, which had a 1x liquidation preference, were valued at 65 cents on the dollar. The answer was simple: no market, no buyers, long exit horizon.

We use restricted stock studies and option pricing models to calibrate illiquidity adjustments. The SEC and IRS accept these frameworks, provided documentation is thorough.

Interaction Effects: Not Just Additive

Applying all three adjustments in series can exaggerate or understate fair value. For example, a 25 percent control premium followed by a 20 percent minority discount does not cancel each other out.

We model adjustments multiplicatively and test scenarios. The goal is to align valuation with deal economics, not to stack assumptions.

Negotiation Tool and Disclosure Sensitivity

Premiums and discounts are often embedded in deal negotiations, even if not explicitly stated. But in fairness opinions, ASC 820 valuations, and tax valuations, disclosure is critical.

We maintain a library of transaction memos that articulate:

• Rationale for each adjustment
• Benchmark data
• Scenario testing outputs

This improves audit defensibility and board alignment.

Conclusion: A Language of Economic Substance

Control premiums and discounts are not artifacts of valuation theory. They are tools to express economic substance and contractual reality. For CFOs, fluency in this language is essential for credible negotiation, financial reporting, and investor dialogue.

Insight

Every seasoned CFO has faced that pivotal moment in a deal when the buyer balks, the seller digs in, and everyone stares at the valuation delta wondering what exactly went wrong. Often, the issue lies not in the headline number, but in the invisible architecture of pricing—specifically, the premiums and discounts that modify enterprise value into the real-world offer. These adjustments are not just technicalities. They are deeply strategic expressions of bargaining power, governance rights, liquidity profiles, and market realities.

Over the past 30 years, I have negotiated dozens of deals where the value gap hinged not on revenue projections or synergies, but on disagreements about control premiums and minority discounts. In one mid-market buyout in 2022, I watched the final negotiation hinge on a 3 percent spread in the proposed control premium. The seller insisted on 30 percent based on precedent transactions. We countered with 25 percent, anchored in specific operational improvements we could model and defend. The deal closed at 28 percent, but only after we committed to a refinancing plan and asset rationalization that could unlock those gains. That is the essence of a justified control premium: it pays for agency, not aspiration.

Control premiums are often misunderstood. They are not gifts. They are priced on the buyer’s ability to act. The right to replace management, redirect capital, sell non-core assets, and change product strategy has a quantifiable value. But that value must be earned. Buyers who pay premiums without a post-close playbook end up writing off goodwill later.

Minority discounts are the flip side. When you lack the ability to influence the business, your stake is worth less. That is not cynicism; it is math. In one Series A secondary sale, the seller held a small position with no board seat, no veto rights, and no information rights. The company was growing, but the position was functionally passive. We applied a 25 percent discount. Some saw it as aggressive. We saw it as prudent. You cannot pay for control you do not have.

Illiquidity is the least visible but often the most significant of the adjustments. Private company shares are not just hard to sell. In many cases, they are unsellable without a company-facilitated transaction. The lack of a liquid market introduces risk and time discounting. I once worked with a biotech founder who held preferred shares with robust preferences. On paper, her stake was worth $3 million. But when she tried to sell a portion, the only offer was at a 40 percent discount. Why? No market, no buyers, no clear exit timeline. The value on paper did not match the value in hand.

We have since adopted a rigorous framework for quantifying illiquidity. We use a combination of restricted stock studies, option pricing models, and market volatility adjustments. The SEC and IRS both respect this approach, provided the assumptions are clear and the documentation is comprehensive.

Now here is where most models go astray: they stack these adjustments linearly. A 30 percent control premium followed by a 20 percent minority discount is not zero. It is not algebra. It is compounding effects. We apply these factors multiplicatively to reflect their interaction. We also run scenario testing to see how small shifts in each assumption affect final valuation. This is how we turn art into defensible arithmetic.

From a negotiation standpoint, these adjustments are rarely labeled. They are embedded in the back-and-forth of price discussions. But in financial reporting—especially under ASC 820 or in fairness opinions—they must be transparent. We maintain a library of valuation memos that explain our rationale, cite market comps, and outline sensitivity cases. This not only withstands audit scrutiny but also aligns boards on how value was determined.

These tools are also strategic levers. In one deal, we offered a 15 percent control premium upfront but conditioned it on board alignment around a post-close restructuring. The seller accepted because they saw the path to realization. In another, we refused to reduce our price but agreed to provide a liquidity path for minority holders within 18 months. These concessions, grounded in discount logic, allowed us to preserve headline price while addressing risk concerns.

The broader takeaway is this: premiums and discounts are the language of financial realism. They recognize that all equity is not created equal. Voting rights, exit rights, transfer rights, and participation rights each carry value or impose cost. As CFOs, we are the translators between economic substance and financial presentation.

Premiums and discounts are not relics of valuation textbooks. They are active instruments in deal design, capital allocation, and shareholder management. We must not only understand them. We must wield them. Because the difference between a fair deal and a failed one is often not the business—it is the math behind the offer.

Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Always consult with qualified professionals before making valuation-related decisions.