August 2023
According to the International Valuation Glossary - Business Valuation, a Control (or Acquisition) Premium is “an amount or a percentage by which the pro rata value of a controlling interest exceeds the pro rata value of a non-controlling interest in a Business Enterprise, to reflect the power of control.“ In other words, it’s the percentage above the market capitalization of a public company (or aggregate minority value of a private company) that an acquirer needs to pay to effectuate control.
Investors who seek to buy controlling interests in companies, in order to be able to set policies and direct operations, must normally offer to buy stock at prices higher than are evidenced by the usual minority interest exchanges. The range of premiums paid, if any, is very large for individual transactions. The extent of the premium largely depends on the level of synergies between the two companies or the level of additional earnings than can be generated due to the acquisition. In addition, a change in the risk level of future earnings due to the acquisition would also affect the control premium.
Having control generally provides the acquirer with the ability to: 1) run the day-to-day operations of the target via control of the board of directors; 2) make acquisitions and consolidations; 3) liquidate the company; and 4) pay dividends or make distributions.
FactSet Review reports that the U.S. median control premium offered in 2022 was 38.6%, calculated based on the seller’s closing market price five business days before the initial announcement (excluding negative premiums and premiums over 250%). The range of median premiums from 2013 to 2022 was a low of 26.9% in 2017 and a high of 43.0% in 2020. In 2022, 52% of the control premiums offered ranged from 0% to 40%, with about one-half of those in the 0% to 20% range and one-half in the 20% to 40% range. However, the range of appropriate control premiums for closely-held companies is greater than that for public companies.
One of the most important determinants of control premiums for closely-held companies that is not usually seen in the public market is officer compensation. This is due to the fact that owner/officers in closely-held companies often set their compensation at levels above that which would be paid to a non-owner officer with the same duties. This higher level of compensation is to the detriment of the minority interest holders and, thus, control is more important, producing a higher control premium. In other words, the difference between the value on a control basis and a minority basis is greater due to the higher level of compensation to the owner/officer.
On the other hand, the control premium for a company that distributes most or all of its income would typically be lower, as the need for control by the minority interest holder is lower. Likewise with excess compensation, any expense of the acquired company that can be eliminated without affecting the financial performance of that company will cause the control premium to be higher.
Relevant Court Cases
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McGovern v. McGovern,
Appellate Division of the Supreme Court
of the State of New York,
2023 NY Slip Opinion 03956,
filed July 27, 2023
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David Myers v. Academy Securities, Inc.,
Court of Chancery of Delaware,
C.A. No. 2023-0241-BWD,
filed July 27, 2023
Recent Business Valuation Articles
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“The Value of a Loss: The
Impact of Restricting Tax Loss Transfers,”
by Anna Theresa Buhrle, Elisa Casi, Barbara Stage
and Johannes Voget,
dated August, 2023
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“Fair Value Measurement,”
by Meysiana Titi,
posted July 31, 2023
Recent Engagements
- Consulting regarding 100% of the common stock
of a specialty supplier on a controlling interest
basis for potential sale purposes.
- Valuation of a 20% limited partnership
interest of a mostly equity investment company
on a minority interest basis for estate tax
reporting purposes.
- Valuation of the non-voting common stock of
a niche security firm on a closely-held
minority interest basis for issuance/income
tax reporting purposes.
- Valuation of a 100% member interest in a mostly
real estate holding company on a controlling interest
basis for gift tax reporting/sale purposes.
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