Valuation Adjustments The most common types of valuation adjustments are discounts for lack of control, which address the degree of control, if any, attributable to a particular interest and discounts for lack of marketability, which address the ability to liquidate an investment in a timely and certain manner.       There are no prescribed levels of valuation adjustments, the facts and circumstances of each case  determine the adjustments, if any, to be made on the basis of the level of value obtained from applying the selected valuation methodology.  Control Discounts and Premiums: A Primer   The application of discounts and premiums in valuing interests in privately held companies is often misunderstood by users of valuation reports. This article focuses on discounts and premiums based on a shareholder's degree of control over the entity being valued. We'll address other potential adjustments, such as the discount for lack of marketability, in future publications.   The key to understanding discounts and premiums is to recognize that they represent adjustments to some base definition of value. Until the base value is clearly defined, it's impossible to determine what sort of adjustment, if any, is appropriate for the interest in question.   A particular valuation method, for example, may produce a control level of value. If that method is used to value a minority interest in a privately held company, a discount for lack of control may be appropriate.   Conversely, if a valuation method produces a minority value and a controlling interest is being valued, a premium might be considered.   An examination of three common valuation approaches,  methods and their resulting levels of value will help illustrate this concept. Asset-Based Approach - Net Asset Value Method  Under this method, the valuator examines the company's balance sheet and marks assets and liabilities, both tangible and intangible, up or down to fair market value. The difference is the value of equity.  Income Approach - Discounted Cash Flow Method   Under this method, the valuator computes the present value of the company's estimated future cash flow. Arguably, this method can produce either a control or a minority level of value depending on whether control is reflected in the cash flow projections. If estimated future cash flow includes elements of control, for example, then the DCF method would yield a control level of value.    Market Approach - Merger and Acquisition Method   Here, the valuator applies adjusted multiples derived from the prices at which entire companies or operating units, or substantial interests in companies, have changed hands. Because M&A transactions almost always involve controlling interests, this method yields a control level of value.   If a minority interest is being valued, a discount for lack of control might be considered. If a control interest is being valued, the result would already be a control level of value, and no premium for control would be appropriate.   Major issues surround minority interest discounts     Among the most common ? and sizable ? valuation discounts is the discount for lack of control (also called the minority interest discount).   Minority interests generally trade at a discount from their pro rata share of a company's overall enterprise value, because minority shareholders can't control key aspects of the company's operations. They can't exercise elements of control, for example, hire management, set policy, liquidate the company or its assets, register for a public offering, or declare dividends.  "Elements of control" refers to the ability of a controlling shareholder to enhance the value of his or her shares by directing or influencing business policies. A common example is owner compensation. It's not unusual for an owner who works in the business to receive above-market compensation. The buyer of a controlling interest would be in a position to ensure that executive salaries would reflect the value of services provided, thereby boosting the company's income and increasing shareholder value.