Control Premium

What is a Control Premium?

In business valuation, a control premium is an additional value associated with rights that permit control over a company’s decisions. It is often discussed when comparing a controlling stake with a non-controlling stake.

Valuation meaning

In Damodaran’s explanation of the value of control, the value of control depends on the difference between the business under its current management and under improved management. Control need not have a large additional value when little improvement is possible.

A transaction premium is not automatically a pure measure of control. The valuation assumptions and the rights being purchased must be clear.

Examples in Acquisitions

Control premiums are discussed in mergers and acquisitions, private-equity investments, and buyouts. A buyer may value the ability to change operations, management, or strategy. The relevant question is what those changes could add compared with the business continuing as it is.

Paying above the current share price does not tell you how much was paid for control alone. The buyer’s expectations may also be wrong. A premium can be paid without the expected improvement ever appearing.

Related Behavioral Research

The value of retaining decision authority is a related but different question. In Fehr, Herz, and Wilkening’s experiment, people sometimes retained authority despite a material incentive to delegate. That laboratory result concerns nonfinancial benefits of authority; it is not an estimate of a corporate acquisition premium.

Limits

The term does not imply a universal percentage or establish that a premium is justified in a particular transaction.