Quick answer: Valuation discounts and premiums adjust a value for the features of the ownership interest being valued, not for the business itself. A control premium recognizes the added value of being able to direct a company. A minority discount reflects the absence of that ability. A discount for lack of marketability reflects how hard it is to sell an interest in a private company. They matter when valuing part of a company, such as a partner’s share, and they usually do not apply in the same way when a buyer acquires the whole business.
Key points
- These adjustments change the value of an interest, not of the business. They come into play for partial stakes: a partner’s share, a minority holding, a gift or estate transfer, or a buyout under a shareholder agreement.
- A control premium and a minority discount are two views of the same idea. Being able to set strategy, pay, distributions and the sale of the company is worth something, and not having that ability is worth less.
- The discount for lack of marketability is applied after any minority discount or control premium and is set on its own factors, according to the IRS’s reference material for its valuation staff.
- There is no standard discount. The size depends on the rights attached to the interest, restrictions on transfer, the expected holding period and the condition of the company, and it is a matter of professional judgment.
Why the value of an interest is not the value of the business
A company has a value, and each ownership interest in it has a value, and the two are not always proportional. Suppose a company is worth a certain amount in a sale of the whole business to a buyer who gets full control. A person who owns a third of its shares does not necessarily hold a third of that amount. The holder cannot choose management, set compensation, decide on distributions or sell the company, and the shares may be hard to sell because there is no public market for them.
Valuation discounts and premiums capture that difference. They are adjustments applied to a value to reflect features of the specific interest. They do not correct for a weakness in the company. A valuation of the business comes first, and these adjustments come after, if at all.
Levels of value
Valuers often organize the adjustments by the level of value being measured.
- Controlling interest, marketable. The value of the whole business or a controlling stake, as if it could be sold readily. This is the level that a negotiated sale of an entire company is closest to.
- Minority interest, marketable. The value of a stake that does not control the company but could be sold easily, like a share of a public company. The adjustment from the first level is the minority discount, or equivalently the removal of a control premium.
- Minority interest, non-marketable. The value of a non-controlling stake in a private company that cannot be sold quickly. The further adjustment is the discount for lack of marketability.
Knowing the level a number sits at is the first step in reading any valuation that mentions a discount.
Control and minority
Control is the power to direct the company. It can include the right to appoint directors and officers, set pay, approve budgets, decide on distributions, change the business, sell assets or sell the whole company. Control is a bundle of rights, and a holder may have some and not others, depending on the share count and the governing documents. A majority stake that needs a supermajority vote for key decisions may carry less control than the percentage suggests.
A control premium is the extra value attached to controlling a company. A minority discount, also called a discount for lack of control, is the reduction applied to a value because the holder cannot direct the company. They are two sides of one relationship: a given control premium implies a corresponding minority discount.
The adjustment is not automatic. If the company is run well and distributes its earnings, a minority holder loses little by not having control. If the controlling owner can pay itself freely or retain all earnings, the minority stake is worth much less. The analysis depends on the facts.
Marketability
Marketability is the ability to turn an ownership interest into cash quickly and at low cost. The IRS’s reference material for its valuation professionals describes the discount for lack of marketability as a deduction from an interest’s value to reflect the relative absence of marketability, and it is applied when the earlier steps of the valuation produce a value that assumes the interest could be sold readily.[1] A share of a private company usually cannot be sold on short notice. Buyers are few, information is limited, transfer is often restricted and the holder may have to wait for the controlling owner to sell.
The same material lists the kinds of facts that bear on the size of the discount. It separates factors about the company, such as its financial condition, earnings, dividend history, management and business risk, from factors about the interest, such as restrictions on transfer, the expected holding period and market conditions.[1] The more it would cost, or the longer it would take, for the holder to exit, the greater the discount tends to be.
Published studies are often used to support discounts, such as those that compare restricted shares with freely traded shares of the same company. The IRS’s reference material reviews several types and cautions about their limits: small samples, wide variation between individual results, heavy reliance on historical data, and the difficulty of separating marketability from other effects.[1] A study can inform the analysis, but it does not replace it.
How the adjustments combine
The order matters. The same reference material says the discount for lack of marketability is applied after any minority discount or control premium, and that it should be determined on its own factors and not folded into the others.[1] Because each adjustment applies to the amount left by the one before, they multiply and do not add.
Illustrative example: Stacking the adjustments on a minority stake
A company’s equity is valued at $20,000,000 on a controlling, marketable basis. A partner owns 30 percent of the shares. The pro rata share is $6,000,000.
| Step | Illustrative adjustment | Resulting value |
|---|---|---|
| Pro rata share of control value | None | $6,000,000 |
| Minority discount | 15 percent | $5,100,000 |
| Discount for lack of marketability | 20 percent | $4,080,000 |
The two adjustments together reduce the pro rata amount by 32 percent, not 35 percent, because the second applies to the result of the first. The percentages are invented to show the arithmetic and are not benchmarks. A real analysis would support each one with facts about the company and the interest.
When they apply and when they do not
A sale of the whole company. The buyer acquires control, so a minority discount does not apply. Buyers account for risk in other ways: the multiple, the earnings they accept and the structure of the deal. The guide to valuation multiples shows how risk moves price.
Partner and shareholder buyouts. The agreement among the owners usually decides, and a clear clause saves a dispute. The guide to partner buyout valuation explains the questions to settle in advance.
Gift and estate planning. Transfers of minority interests for tax purposes are where discounts are most prominent, and the valuation follows the standards of tax valuation. The comparison of transactional valuations and appraisals explains why those engagements call for an appraisal.
Disputes. The legal standard, such as fair market value or statutory fair value, determines whether discounts are permitted. Counsel should confirm it.
What an owner should take from this
If you are selling the entire business, your concern is how buyers will price the risks of the company, which is addressed by the earnings, the multiple and the structure of the deal. If you are valuing a partial interest, the discount and premium decisions can move the number more than almost any other judgment, and they should be explained in the valuation. Ask any valuation you rely on to state its standard of value, the level of value it reports and whether it applies a minority discount, a marketability discount or both, with the reasons. The guide to valuation methods covers how the underlying value is built, and the overview of transactional valuation explains when a valuation that estimates likely deal pricing is the better tool.
Frequently asked questions
Do discounts apply when I sell my entire company?
A minority discount does not, because the buyer is acquiring control. Whether any marketability adjustment belongs in the analysis of a controlling interest is a matter on which valuation practitioners disagree, according to the IRS’s reference material, and those who do apply one generally agree it is smaller than for a minority interest.[1] In negotiations, buyers usually express risk through the multiple and the structure of the deal, not through a labeled discount.
What is a typical discount for lack of marketability?
There is no fixed figure. The IRS’s reference material describes setting the discount as a fact-intensive exercise that depends on the valuator’s judgment, and it cautions against simply applying an average from published studies without examining the underlying data and the circumstances of the interest being valued.[1] Anyone quoting a standard percentage without explaining the facts behind it is skipping the analysis.
Are discounts allowed in a divorce or a shareholder dispute?
It depends on the standard of value that applies, which comes from the governing law and the agreements in place. Some contexts use fair market value, which usually recognizes discounts, and others use fair value as defined by statute or case law, which may restrict them. Ask counsel which standard applies before commissioning a valuation.
Can a shareholder agreement decide whether discounts apply?
Yes, and it is one of the most useful things such an agreement can do. A buy-sell agreement can state the standard of value, the valuation date, who performs the valuation and whether discounts for control or marketability are applied. Without that language, the parties often dispute the point when a buyout is triggered.
Need a valuation you can use in a sale or acquisition decision?
The Impetus Group prepares transactional valuations from the standpoint of strategic and financial buyers. A valuation is a standalone engagement with its own scope and fee, and it can be the first step before a sale or acquisition process.
Related guides
- Transactional Valuation vs. Appraisal: Which Do You Need?: A transactional valuation estimates what a buyer would pay. An appraisal estimates value under a legal or tax standard. See how they differ and which one fits.
- Business Valuation Methods: Income, Market and Asset Approaches: The income, market and asset approaches to valuing a private company, the methods inside each, when each fits and how valuers reconcile the results.
- Valuation Multiples Explained: EV/EBITDA, EV/Revenue and More: What valuation multiples are, how EV/EBITDA, EV/revenue and EV/EBIT work, what drives a higher or lower multiple, and how to use public data with care.
- Partner Buyout Valuation: How to Value a Co-Owner’s Share of a Business: How to value a partner’s share in a buyout: the standard of value, discounts, valuation date, buy-sell agreement terms and how payment is structured.
- Transactional Valuation: What It Is and How It Works: A transactional valuation estimates what a strategic or financial buyer would pay for a business. Learn what goes into one and how it differs from an appraisal.
- EBITDA Add-Backs: What Buyers Accept and What They Reject: Learn which EBITDA add-backs buyers accept in a sale, which they reject, and how adjusted EBITDA changes enterprise value, with a worked illustration.
Sources
- Discount for Lack of Marketability Job Aid for IRS Valuation Professionals (reference only, not an official IRS position). Internal Revenue Service. Accessed October 8, 2026.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.