Business Valuation: Premiums and Discounts

Introduction: Understanding premiums and discounts in business valuation

Business valuation is often approached as a purely financial exercise, based on models and numerical assumptions. In practice, however, the value derived from a DCF or valuation multiples is never an end in itself. It represents a starting point that must be adjusted to reflect the economic, legal and transactional reality of the securities being valued. As the saying goes, “Value is not a number, but a well-argued opinion.”

In real-world transactions, what is negotiated is not solely future cash flows, but a combination of rights, constraints and decision-making levers. The degree of control, the liquidity of the securities, the ownership structure and the effective exit options all directly influence the price an investor is willing to pay. This is precisely where valuation premiums and discounts come into play, acting as adjustment mechanisms between theoretical value and market-negotiable value.

The issue may therefore be reformulated as follows: how can a financial value calculated using standard methodologies be transformed into an economically relevant value that properly reflects the rights attached to the securities and the market context of the transaction?

This article first explains why premiums and discounts are essential in business valuation, while also highlighting why they should never be applied mechanically. It then analyses the main premiums and discounts used in practice—discount for lack of marketability, control premium, minority discount and holding company discount—before presenting a summary table of observed market ranges and drawing key conclusions for business owners and investors.

Why incorporate premiums and discounts in business valuation?

The purpose of a business valuation is not merely to produce a numerical outcome, but to provide a credible basis for decision-making and negotiation. Traditional financial methods measure the economic value of a company, yet they do not account for the specific nature of the securities being valued or the rights attached to them. Premiums and discounts are precisely intended to bridge this gap.

The first reason relates to economic and decision-making rights. A controlling interest does not provide the same levers as a minority stake. Similarly, freely transferable securities do not carry the same value as illiquid securities subject to transfer restrictions. Ignoring these differences assumes that all shareholders are in identical positions, which is rarely the case in practice.

The second reason is transactional in nature. In a sale, acquisition or capital increase, investors do not reason solely in terms of future cash flows, but in terms of power, flexibility and exit capacity. Premiums and discounts translate these elements into valuation, aligning financial value with the price that can realistically be negotiated in the market.

Finally, a well-reasoned use of premiums and discounts enhances the credibility of the valuation. It helps anticipate discussions, justify differences in perception between parties and avoid negotiations driven by misunderstanding. When properly justified, premiums and discounts are not opportunistic adjustments, but alignment tools between theoretical value and economic reality.

Why premiums and discounts should not be applied systematically

Although premiums and discounts play a key role in business valuation, their automatic application represents a frequent methodological error. A robust valuation exercise does not consist in stacking adjustments, but in understanding what the chosen valuation method already incorporates implicitly.

In many cases, valuation benchmarks already reflect certain characteristics that premiums and discounts are intended to correct. Transaction multiples derived from private deals, for example, usually reflect situations of control and illiquidity. Mechanically adding a premium or discount in such cases results in double-counting the same factor and may materially distort the valuation outcome.

Moreover, the relevance of premiums and discounts depends closely on the purpose of the valuation and the selected value basis. A valuation performed for tax, reporting or transactional negotiation purposes does not follow the same logic. Applying identical adjustments across all contexts disregards the very objective of the valuation.

Lastly, premiums and discounts are never standard coefficients that can be applied indiscriminately. They must be justified by tangible factors such as shareholder rights, governance, effective liquidity, legal structure or contractual constraints. In the absence of a clearly identified bias, their application becomes arbitrary and undermines the credibility of the valuation.

In practice, a simple rule applies: a premium or discount should only be applied if it corrects a real factor that is not already reflected in the valuation method and is explicitly documented.

Discount for lack of marketability

The discount for lack of marketability reflects the difficulty of disposing of an ownership interest under normal market conditions, within a reasonable timeframe and at an observable price. It is not limited to the absence of listing, but more broadly to the lack of an organised market enabling a rapid and transparent exit.

In the case of non-listed companies, shareholders face uncertain exit timelines, bilateral negotiations and significant information asymmetry. This situation entails a real economic cost related to capital lock-up and the absence of price visibility. The discount for lack of marketability is intended to reflect this disadvantage in the value of the securities being valued.

This discount is most frequently applied in the context of public market comparables. Share prices reflect liquid, freely tradable securities traded on organised markets. When a non-listed company is valued using public comparables, an adjustment is required to correct the liquidity gap between the listed reference companies and the company being valued.

The magnitude of the discount depends on several factors, including exit clauses, contractual transfer restrictions, stake size, ownership structure and cash flow visibility. In practice, observed levels generally fall within a range of 20% to 40%, without being applied mechanically.

Control premium

The control premium corresponds to the additional price an acquirer is willing to pay in a transaction to obtain full or majority control of a company. It is therefore fundamentally transactional in nature and reflects behaviour observed in mergers and acquisitions rather than a purely theoretical adjustment.

In an M&A transaction, the acquirer does not simply purchase future cash flows. Control provides decision-making power, strategic autonomy and the ability to actively shape the target’s future. The observed overpayment relative to a standalone financial value reflects this pursuit of control and the potential to implement the acquirer’s own strategy.

From a methodological perspective, the control premium is primarily observed through transaction comparables. Transaction multiples generally reflect prices paid for controlling stakes and implicitly incorporate this control premium. When such multiples are used to value a non-controlling interest, an adjustment is required to neutralise this effect.

The control premium may also be viewed as the direct counterpart of the minority discount. In this framework, control value becomes the reference, while the absence of decision-making power justifies a reduction in value for minority holdings.

In practice, control premiums observed in transactions generally fall within a range of 15% to 30%, with significant variation depending on sector, target size, competitive dynamics and expected synergies.

By way of illustration, in mergers and acquisitions transactions supported by Hectelion, control premiums ranging from 15% to 25% have been observed. These premiums primarily reflect the gap between the seller’s expectations and the price effectively paid by the acquirer in negotiations aimed at obtaining full or majority control of the company.

Minority discount

The minority discount reflects the loss of value associated with the absence of decision-making power attached to a non-controlling interest. A minority shareholder lacks strategic control and cannot impose decisions relating to governance, distribution policy or major corporate transactions.

In practice, this situation creates a significant economic asymmetry. Even though the stake entitles the holder to a share of future cash flows, the minority shareholder depends on controlling shareholders for their effective realisation. Uncertainty surrounding dividend levels, distribution timing and exit conditions justifies a reduction in value relative to a controlling interest.

From a methodological standpoint, the minority discount is frequently applied when valuations rely on transaction benchmarks. Prices observed in M&A transactions typically reflect control situations. When valuing a minority interest based on such references, an adjustment is required to neutralise the embedded control effect.

The relevance of the minority discount depends closely on the level of protection afforded to minority shareholders. Specific rights, exit clauses, balanced shareholder agreements or structured governance frameworks may mitigate its impact. Conversely, concentrated control and weak protection mechanisms reinforce its relevance.

In practice, observed minority discounts generally fall within a range of 15% to 40%, depending on ownership structure, rights attached to the securities and the valuation context.

Holding company discount

The holding company discount reflects the loss of value associated with the interposition of a holding structure between the investor and the underlying operating assets. When a company has no operating activity and merely holds participations, its value does not mechanically equal the aggregate value of its subsidiaries.

This discount arises from several economic and structural factors. Holding companies typically incur recurring overhead costs independent of subsidiary performance. They may also generate tax frictions upon dividend upstreaming or asset disposals. Governance constraints and increased complexity may further limit strategic flexibility and reduce transparency for external investors.

From an economic perspective, the holding company represents an additional layer between shareholders and cash flows. This intermediation reduces effective liquidity and may delay cash flow access, justifying an adjustment relative to the net asset value of the underlying holdings.

Holding company discounts are frequently observed in family groups, patrimonial structures and long-term holding entities. Their magnitude depends on the degree of control over subsidiaries, financial transparency, applicable taxation and the holding’s ability to create value beyond asset ownership.

In practice, observed levels generally fall within a range of 10% to 30%, and should never be applied automatically. As with any premium or discount, they must be justified based on the specific valuation context and structural characteristics.

Other premiums and discounts

Beyond the most commonly used adjustments, additional premiums and discounts may be applied in specific contexts where security structure, governance or risk profile justify them. Their use remains exceptional and must be carefully documented to avoid arbitrariness.

• A discount for lack of voting rights may apply when the securities being valued do not carry the same political rights as ordinary shares. This situation is common in structures involving preferred shares with enhanced financial rights but limited voting power, or in certain private equity structures.
• In some cases, a key person dependency discount may be applied to reflect the economic risk associated with the loss of a founder, executive or essential partner. This discount is only relevant if the risk has not already been captured in operating assumptions or the discount rate, and if succession mechanisms are insufficient.
• A blockage discount may also arise where the disposal of a significant stake entails specific constraints. This may occur when stake size complicates exit execution or when disposal triggers legal, tax or governance consequences.
• In diversified or complex groups, a conglomerate discount may be observed, reflecting investors’ difficulty in analysing and valuing heterogeneous activities within a single structure. This discount is often linked to limited strategic coherence, weak synergies or suboptimal capital allocation.
• Lastly, certain valuations may incorporate a premium or discount related to a company’s specific risk profile where this is not adequately reflected in standard financial parameters, such as regulatory risk or excessive commercial dependence.

These premiums and discounts should remain exceptional adjustment tools. Their application is justified only where they correct a clearly identified bias not already reflected in the valuation methods used. Otherwise, they weaken rather than strengthen valuation credibility.

Summary table of key valuation premiums and discounts

This indicative table presents the main premiums and discounts observed in practice, their economic rationale, application context and typical observed levels. It serves as a reference tool rather than an automatic adjustment grid.

Management’s perspective

Experience shows that premiums and discounts are essential mechanisms in business valuation, yet they remain imperfectly mastered in practice. Across transactions in which Hectelion has participated or contributed, it appears that relatively few institutions or investment banks apply these adjustments in a rigorous and consistent manner.

In certain observed cases, the absence or incorrect application of these mechanisms has led to significant valuation imbalances. These discrepancies do not necessarily stem from deliberate intent, but often from insufficient technical mastery or valuation expertise, particularly regarding shareholder rights and transactional context.

A relevant valuation does not rely solely on financial models, but on the ability to interpret results correctly, understand market mechanisms and apply adjustments with discernment. When poorly understood or misused, premiums and discounts may undermine valuation credibility and unnecessarily complicate negotiations.

This is why a structured, documented and consistent approach to these adjustments is essential to secure strategic decisions and ensure balanced and transparent negotiations.

Conclusion: From theoretical value to negotiable value — the key role of premiums and discounts

Premiums and discounts play a central role in bridging the gap between theoretical financial value and economically and transactionally relevant value. They integrate essential elements that traditional models do not directly capture, such as liquidity, decision-making power, ownership structure and governance constraints.

Their use nevertheless requires rigour and judgment. Applied mechanically or without methodological justification, they may introduce significant bias and weaken valuation credibility. Conversely, when properly identified, documented and aligned with the selected methodology, premiums and discounts enhance analytical relevance and facilitate dialogue between stakeholders.

The objective for business owners and investors is therefore not to maximise or minimise value, but to determine a fair, defensible and understandable value. A successful business valuation relies on the balance between financial modelling, contextual understanding and mastery of adjustment mechanisms.

In an environment where strategic decisions increasingly depend on the quality of financial analysis, a sound understanding of valuation premiums and discounts represents a key lever for securing transactions and creating sustainable value.

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Author

Aristide Ruot, Ph.D
Founder | Chief Executive Officer