The Discount for Lack of Control (DLOC) accounts for the increased risks that comes with not having controlling power or decision-making authority. It represents one of the three principal discounts in business valuation.
Defining Discount for Lack of Control
Like the Discount for Lack of Marketability (DLOM) and the Key Person Discount, the DLOC recognizes a fundamental truth in the marketplace: ownership interests lacking control, in the grand scheme of things carry less value, but, “there is a but”.
This risk is difficult to quantify, as investor reactions vary widely—some avoid such deals entirely, while others remain unfazed. While the issue has measurable impact at a broader statistical level, the variability is significant. In practice, it becomes most relevant when there is disagreement among the business owners.
Just as with marketability considerations, the extent and relevance of a control discount must be assessed with sound professional judgment — not by mechanically applying broad industry averages.
Addressing Minority Ownership Risk
In theory, lacking control over a business elevates investment risk, which leads investors to demand a return premium.
In reality, the importance of this risk differs significantly across scenarios. Certain venture capital investors are comfortable with non-controlling interests, whereas many private equity groups prefer to avoid minority stakes altogether.
Additionally, perspectives on control can depend heavily on company-specific factors. A small business with 50-50 ownership, where one owner wants out, is almost impossible to sell to anyone else but the remaining partner, unlike a larger business with hundreds of shareholders, where this is much less of an issue.
Tailored DLOC Assessment Is Essential
Despite the continued reliance by some appraisers on databases of control premiums and historical discount studies — many of which are based on outdated (from the Vietnam war era) — using them without applying critical thinking runs counter to both modern market conditions and the interpretive guidance in Revenue Ruling 59-60.
Referencing such studies cannot replace the footwork required, to simulate how this would be viewed by a real-world buyer.
In our Texas-based valuation practice, we treat DLOC as a matter of professional judgment, aligned with the individualized, case-by-case reasoning emphasized in RR59-60. Where relevant, any control-based adjustment is transparently supported with clear justification and directly tied to the factual circumstances — never defaulted to generic metrics or formulaic templates.
