A 40% stake in a private company is often worth far less than 40% of the company's value. That wedge, driven by control and marketability, is where most of the exam points in this reading sit.
Public company valuation starts from audited statements and an observable share price set by many arms-length participants. Private company valuation starts from neither. The mechanics of discounting cash flows or applying multiples do not change; the inputs and the final adjustments do.
Two clusters of differences matter. Company-specific factors can cut either way: an early-stage founder-controlled firm may have far more growth potential than a listed peer, while a small firm in a mature industry may be at a structural disadvantage. Stock-specific factors are almost uniformly negative for value.
Owner/manager overlap cuts agency costs and lets management take a longer horizon, but it also means related-party dealing. Concentrated control means corporate actions can transfer value from non-controlling holders to the control group through above-market compensation or related-entity transactions. Shareholder agreements restricting sale further reduce marketability.
Common mistakes
- Adding DLOC and DLOM. 16.67% + 20% = 36.67% understates value. They multiply: the true total is 33.33%, a $228,667 difference on a $6,860,000 base.
- Applying a control premium to a control multiple. Guideline public company multiples come from non-controlling trades and need the premium; guideline transactions multiples do not.
- Normalizing owner compensation the wrong direction. An owner taking $1,500,000 when the market rate is $500,000 means adding back $1,000,000. An owner taking nothing means subtracting a market salary, which lowers earnings.
Bottom line
- Company-specific differences: life-cycle stage, smaller size, concentrated ownership, limited disclosure, owner/manager overlap; these can raise or lower value
- Stock-specific differences: illiquidity, concentrated control, sale restrictions; these lower value
- Three uses: transactions (VC, private equity, debt, IPO, M&A, bankruptcy, share-based compensation), compliance (financial and tax reporting), litigation
- Three focus areas: normalized earnings (numerator), discount rate (denominator), control and marketability adjustment
Exam shortcut
Read the stem for the interest being valued before you touch the numbers. "Controlling interest" means DLOC is zero and DLOM is small; "10% passive stake" means both discounts apply, multiplicatively. The additive total discount is always the trap answer, so compute (1 − DLOC)(1 − DLOM) once and keep it.
The full lesson (about 3,075 words, 21 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- private company valuation
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