In many valuations of private businesses, appraisers begin with a discounted cash flow (DCF) and add a control premium, using 20% as a “rule of thumb.” But if the DCF inputs already reflect a well-managed firm, then any control premium may be double counting, cautions Aswath Damodaran, NYU finance professor, in BVR’s recent Telephone Conference on Control Premia. Some clues to look for: “If you use target debt ratios, industry average margins and optimistic earnings growth numbers, then you are doing an optimal valuation,” he says. “The value of control can be zero if a firm is already optimally run.” For a transcript and/or CD of the complete telephone conference (also featuring an overview of the Mergerstat Control Premium Study), click here.
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