Understanding Discount for Lack of Control ("DLOC")

When it comes to valuing private companies, two essential adjustments often come into play: the Discount for Lack of Marketability ("DLOM") and the Discount for Lack of Control ("DLOC"). These concepts help ensure valuations reflect the real-world limitations investors face, especially when securities aren’t publicly traded or when investors don’t have decision-making authority.

For the second of the two adjustments, DLOC, let’s break down the adjustment, when it apply, and how to quantify it. For DLOM, please see our other article.

Discount for Lack of Control (DLOC)

Control refers to the power to influence a company's management and policies. If your investment doesn’t come with control rights, its value is lower.

Is Your Position One of Control?

Ask:

• Does the investor own >50% of voting shares?

• Do you have the ability to direct management decisions?

• Are cash flows shared equally among investors?

Even with a controlling stake, other factors—like investor coalitions or regulatory influences—can dilute real control.

Matching Control Level to Valuation Method

The valuation approach must match the nature of the security. If you’re valuing a 'control' security using public trading comparables, a DLOC is necessary to adjust the minority result from the valuation approach to match the control nature of the security

Valuation Method	Control Level
Public Trading Comparables	Minority
Private M&A Transactions	Control
Public M&A Transactions	Control
DCF (Income Approach)	Typically Neutral*

*Unless the cash flows modeled assume control (e.g., ability to change operations), in which case no DLOC is needed.

Applying the DLOC

When going from a control value to a minority value, apply a Minority Discount using this formula:

Minority Discount = (1 / (1 + Control Premium)) – 1

Use control premiums observed in precedent control transactions to calculate this discount.

Where Do You Apply It?

Just like DLOM, apply DLOC to equity value excluding cash. Control doesn’t apply to debt or cash—just the operations and future profitability of the business.

Final Thoughts

• Align your valuation method with the characteristics of the security (control vs minority).

• Use DLOC adjustments only when appropriate, and only to the equity portion of the business.

• Calibrated valuations typically do not require DLOC adjustments, as market conditions are already priced in.