Principles of Private Firm Valuation

105

Estimating the Value of Control

CHAPTER

7

I

n their control premium study, Houlihan Lokey Howard and Zukin define
a control premium as the additional consideration that an investor would
pay over a marketable minority equity value (i.e., the Wall Street Journal
price) in order to own a controlling interest in the common stock of a com-
pany.^1 The authors further state:

A controlling interest is considered to have a greater value than a

minority interest because of the purchaser’s ability to effect changes

in the overall business structure and to influence business policies.

Control premiums can vary greatly. Factors affecting the magnitude

of a given control premium include:

1. The nature and magnitude of non-operating assets.


2. The nature and magnitude of discretionary expenses.


3. The perceived quality of existing management.


4. The nature and magnitude of business opportunities, which are
   not currently being exploited.


5. The ability to integrate the acquiree into the acquirer’s business
   or distribution channels.

This definition raises several important and immediate questions about the
size of the control premium and how to estimate it when valuing a private
firm. This chapter addresses these and related issues. We set the stage for
this discussion by reviewing research that deals with the acquisitions of pri-
vate firms, and we compare the characteristics of these acquisitions with
those of the public firm takeover market. The differences between private
firm and public firm acquisitions are striking, particularly as they relate to
the size of the takeover premiums. We extend our discussion by addressing
the takeover premiums associated with family-owned businesses. We then
move ahead to the more crucial issue of how to estimate the premium under