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CFA Level II Exam · Private Company Valuation

Valuation Discounts and Premiums: DLOM, DLOC and Control Premium

Updated 7 October 2026 · Fact-checked

Valuation discounts and premiums adjust a private company's value for the level of value you need. A control premium or discount for lack of control (DLOC) adjusts for control rights. A discount for lack of marketability (DLOM) adjusts for illiquidity. You apply them in the right order and convert premiums to discounts with the formula.

Understand Valuation Discounts and Premiums

A valuation is only meaningful when you know what level of value it measures. A controlling owner can change management, set strategy, pay dividends or sell the firm. A minority owner cannot. That difference in power is worth something, and it is captured by the control premium or the discount for lack of control.

The control premium is the extra amount a buyer pays over the minority (marketable) value to gain control. The discount for lack of control (DLOC) is the reverse view. It is the reduction from a controlling value to a minority value. They describe the same gap from two sides, so you can convert one into the other.

The discount for lack of marketability (DLOM) is separate. It reflects that shares in a private company cannot be sold quickly, cheaply or at a known price, unlike listed shares. Even a controlling stake in a private firm can carry a DLOM, though it is often smaller. DLOM is usually estimated from restricted stock studies, pre-IPO studies or option-based models.

In practice you start from a value on one basis, such as a guideline public company value that is marketable and minority. Then you add or remove control and marketability effects to reach the level the question wants. The order matters, because the discounts are applied one after another to a changing base. They are not simply added together.

Key formulas to remember

DLOC from control premium
DLOC = 1 − [1 ÷ (1 + control premium)]
Use this to convert a control premium to the equivalent discount for lack of control.
Control premium from DLOC
Control premium = [1 ÷ (1 − DLOC)] − 1
Use this to convert a DLOC back to a premium. The premium is always larger than the DLOC.
Combined discount
Total discount = 1 − [(1 − DLOC) × (1 − DLOM)]
Discounts compound. Do not just add DLOC and DLOM. This applies when both are measured on the stated base in sequence.
Value after discounts
Value = Base value × (1 − DLOC) × (1 − DLOM)
Apply each discount to the value left after the previous one.
Value with control premium
Controlling value = Minority value × (1 + control premium)
The premium is applied to the marketable minority value.

How to solve Valuation Discounts and Premiums questions

Use this method on any question about discounts and premiums in a private company valuation.

  1. 1Read the vignette and write down the base value and what it represents, for example marketable minority from guideline public companies.
  2. 2Identify the target level of value the question asks for, such as non-marketable minority or controlling.
  3. 3List which adjustments are needed: control premium, DLOC, DLOM, or a mix. Check whether each given figure is a premium or a discount.
  4. 4Convert premiums to discounts or the reverse using the conversion formulas if the figure is not in the form you need.
  5. 5Apply adjustments in sequence, each on the value left after the previous step. Do not add percentages.
  6. 6If the question asks for a total discount, compute 1 − (1 − DLOC)(1 − DLOM).
  7. 7Sanity check the direction: removing control or marketability lowers value, adding control raises it.
  8. 8Match your answer to the option and note whether the question wants a value or a percentage.

Quickest way: Multiply the factors

When to use it: Use when the vignette gives a base value plus one or two percentages and the answer options are close.

  1. Turn every percentage into a factor: discount d becomes (1 − d), premium p becomes (1 + p).
  2. Multiply the base value by all factors in the right direction.
  3. For premium to DLOC, remember DLOC = p ÷ (1 + p). This is a shortcut for the same formula.
  4. Eliminate options that add the discounts, since they will be too large.
  5. Check the answer is smaller than base for discounts and larger for premiums.

Common mistakes in Valuation Discounts and Premiums

  • Treating a 25% control premium as a 25% DLOC.

    Both describe the same gap, so students assume the numbers match.

    Fix: The two use different bases. Convert with DLOC = 1 − 1 ÷ (1 + premium). A 25% premium gives a DLOC of 20%.

  • Adding DLOC and DLOM to get the total discount.

    Adding feels natural when two percentages are given.

    Fix: Compound them: total discount = 1 − (1 − DLOC)(1 − DLOM). The total is smaller than the simple sum.

  • Applying a DLOM to a value that already reflects marketability issues.

    Students do not check what level of value the base figure represents.

    Fix: Identify the base first. Guideline public company values are marketable, so DLOM may be needed. A value from private transactions may already include illiquidity.

  • Applying a control premium to a value that is already controlling.

    Students apply every adjustment listed in the vignette without checking.

    Fix: A DCF using controlling-based cash flows may already be a control value. Check whether cash flows reflect control changes before adding a premium.

  • Confusing DLOM with DLOC.

    Both are discounts to private company value and both sound similar.

    Fix: DLOC is about power over decisions. DLOM is about ability to sell quickly. Tie each to its reason in the vignette.

Worked examples

Example 1

A vignette values a private firm using guideline public companies, giving a marketable minority value of ₹80 crore. The analyst needs a controlling interest value. Studies show a typical control premium of 25%. (1) What is the controlling value? (2) What is the equivalent DLOC? (3) If the analyst instead needs a non-marketable minority value and uses a DLOM of 15%, what is that value?

Show the solution
  1. Controlling value = 80 × (1 + 0.25) = ₹100 crore.
  2. DLOC = 1 − 1 ÷ 1.25 = 1 − 0.80 = 0.20, or 20%.
  3. Non-marketable minority value = 80 × (1 − 0.15) = 80 × 0.85 = ₹68 crore.

Answer: (1) ₹100 crore; (2) 20%; (3) ₹68 crore.

Example 2

An analyst values a private company at ₹50 crore on a controlling, marketable basis. A client is buying a minority stake in a private firm with no ready market. The analyst estimates DLOC of 10% and DLOM of 20%. (1) What is the value on a non-marketable minority basis? (2) What is the total combined discount? (3) What simple sum of discounts would be wrong, and by how much does it differ?

Show the solution
  1. Value = 50 × (1 − 0.10) × (1 − 0.20) = 50 × 0.90 × 0.80 = ₹36 crore.
  2. Total discount = 1 − (0.90 × 0.80) = 1 − 0.72 = 0.28, or 28%.
  3. Simple sum would give 10% + 20% = 30%, which overstates the discount by 2 percentage points.

Answer: (1) ₹36 crore; (2) 28%; (3) The sum of 30% is wrong; the correct combined discount is 28%, so the sum overstates by 2 percentage points.

Exam tips

  • Always identify the level of value of the starting number before choosing adjustments.
  • Convert premiums to discounts with the formula, not by matching percentages.
  • Compound discounts. Options that use the simple sum are usually distractors.
  • Read the vignette for hints on whether the cash flows or multiples already include control or illiquidity effects.
  • Check the direction of each adjustment before calculating.

Valuation Discounts and Premiums in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Valuation Discounts and Premiums: frequently asked questions

What is the difference between DLOM and DLOC?

DLOC reduces value because a minority owner cannot control decisions. DLOM reduces value because private shares cannot be sold quickly or cheaply. They have different causes and are applied separately.

How do I convert a control premium to DLOC?

Use DLOC = 1 − 1 ÷ (1 + control premium). For example, a 30% premium gives 1 − 1 ÷ 1.30, which is about 23.1%. The DLOC is always smaller than the premium.

Do I add DLOC and DLOM together?

No. Apply them one after another: total discount = 1 − (1 − DLOC)(1 − DLOM). This gives a total smaller than the simple sum.

Does a controlling stake in a private company need a DLOM?

It can, because the shares are still hard to sell. The discount is often smaller than for a minority stake, but you should follow what the vignette says about the base value and the stake.