## **Learning Outcomes**

After reading this article, you will be able to explain the role and calculation of control premiums and minority discounts in the context of business and share valuations. You will understand the difference between financial and operational combined benefits, and how these adjustments are considered in acquisition pricing and negotiations. This knowledge will support your ability to evaluate and advise on real-world acquisition cases in the ACCA Advanced Financial Management (AFM) exam.

## **ACCA Advanced Financial Management (AFM) Syllabus**

For ACCA Advanced Financial Management (AFM), you are required to understand the application of special adjustments in the valuation of entire businesses and shareholdings. In particular, your revision should cover the following syllabus areas:

- The rationale and valuation impact of control premiums and minority discounts in acquisitions and disposals
- The assessment and quantification of expected combined benefits in mergers and acquisitions, including financial and operational benefits
- Application of appropriate adjustments to value for quoted and unquoted companies, and for minority and controlling stakes
- Advice on the strategic implications of valuation adjustments during mergers and takeovers

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. When valuing a controlling shareholding in a private company, which adjustment is most likely required?
   a) Dividend growth premium  
   b) Control premium  
   c) Minority discount  
   d) Earnings yield adjustment

2. True or false? Combined benefit gains in mergers can always be accurately measured before an acquisition takes place.

3. Explain briefly why a minority discount might apply when valuing a small, non-controlling holding in an unlisted company.

4. List two common types of combined benefit expected in a horizontal merger.

## **Introduction**

Valuing a business or shareholding for acquisition, disposal, or investment frequently requires making specific adjustments that reflect differences in ownership rights and anticipated future benefits. This article focuses on three practical and commonly tested topics: control premiums, minority discounts, and combined benefits. These adjustments are especially relevant in mergers and acquisitions, when buyers and sellers negotiate over price and expected benefits. It is essential to understand how these concepts affect the final value assigned to a business or individual shareholding, and how they are represented in ACCA AFM exam scenarios.

## CONTROL PREMIUMS AND MINORITY DISCOUNTS

When a business is valued, the calculated result often reflects the price of a full controlling interest. However, if only a minority stake is being valued, or an investor is purchasing control, the value must be adjusted to reflect these differences in ownership benefits and influence.

> **Key Term: control premium**
> The additional amount above the pro-rata share value paid to acquire a controlling interest in a company, reflecting the ability to influence key strategic and operational decisions.
>
> **Key Term: minority discount**
> The reduction applied to the pro-rata value of a minority shareholding to account for the lack of control and influence over business policies and strategic direction.

### Application in Valuations

A control premium is typically added when acquiring more than 50% of a company, since the new owner gains the power to control the board, set strategy, and determine dividend policy. The opposite applies to minority stakes, which lack such powers and are less attractive to buyers. As a result, a minority discount is often subtracted when valuing small shareholdings, especially in unquoted companies where the market for minority interests is illiquid.

### Factors Influencing Premiums and Discounts

The size of a control premium or minority discount can vary depending on:

- The ability to change management or policies
- Rights to appoint directors
- Influence on distributions and capital structure decisions
- Liquidity of the shareholding (easier to sell large blocks in quoted companies)
- Extent of protections for minority interests

Public data on recent acquisitions often shows control premiums of 20–40% above pre-bid share prices.

### **Worked Example 1.1**

A valuation of an unlisted company based on forecast earnings and a peer-group P/E multiple yields a notional equity value of \$10m for 100% of the shares. If an investor seeks to buy a 10% stake with no board representation or special rights, is an adjustment required, and what type?

> **Answer:**  
> Yes, a minority discount is typically required. The 10% stake does not provide control or influence over strategic decisions. As a result, its value will be less than \$1m (10% of \$10m). If a 25% minority discount applies, the value of the 10% stake would be \$1m × (1 – 0.25) = \$750,000.

### Relationships between Premiums and Discounts

Mathematically, the minority discount is the inverse of the control premium. For example, if a control premium is 33%, the equivalent minority discount is 1 – [1/(1 + 0.33)] = 25%.

## COMBINED BENEFITS IN MERGERS AND ACQUISITIONS

A key driver for mergers and acquisitions is the expectation of increased value from combining two businesses. These anticipated benefits are called combined benefits.

> **Key Term: combined benefit**
> The additional value created by the combination of two firms beyond the sum of their separate values, due to factors such as cost savings, increased revenue, or improved financial performance.

Combined benefits can be categorised as follows:

- **Operational combined benefits**: e.g., cost savings from merging functions or eliminating duplicated resources.
- **Revenue combined benefits**: e.g., selling each other's products to a wider customer base.
- **Financial combined benefits**: e.g., lower overall cost of capital following the merger.

In theory, the maximum price a buyer should be willing to pay equals the stand-alone value of the target plus the present value of expected combined benefits (after deduction of transaction costs).

### Identification and Quantification

Combined benefits should be specific, identified, and where possible, supported by detailed business plans. Overestimating combined benefits is a frequent cause of failed acquisitions and shareholder losses.

### **Worked Example 1.2**

Company A values Company B using stand-alone free cash flows and a suitable WACC, producing a value of \$80m. Their management forecasts annual post-tax combined benefits of \$5m in perpetuity if the merger proceeds, with a WACC of 10%. What maximum price should Company A consider paying, ignoring transaction costs?

> **Answer:**  
> The value of expected combined benefits is \$5m / 0.10 = \$50m. The maximum price = \$80m + \$50m = \$130m.

### **Exam Warning**

> **Overestimation of combined benefits is a common error in both the exam and practice.**  
> In valuation calculations, only include benefit gains that are specific and can be reasonably forecast. If the acquisition is likely to be complex, allow for one-off combination costs or delays in benefit realisation.

## ADJUSTING FOR CONTROL AND MINORITY POSITIONS

### Quoted vs Unquoted Companies

In quoted companies, share prices usually reflect the value of small, minority interests traded freely on the market. In unquoted companies, there is no ready market, and discounts or premiums are often higher.

- When valuing a full acquisition, add a control premium to the observable market price per share if the offer is for control.
- When valuing a minority holding, especially in unlisted companies, subtract an appropriate minority discount based on the lack of control and possible illiquidity.

### **Worked Example 1.3**

A listed company’s shares trade at \$8, with a current P/E of 12. A prospective acquirer offers \$10 per share for 100% control. What percentage control premium does the offer represent?

> **Answer:**  
> Control premium = (\$10 – \$8) / \$8 = 25%.
>
> **Key Term: illiquidity discount**
> An additional reduction in value applied to shares or assets that cannot easily be sold without a price concession, often relevant for unlisted shares.
>
> **Key Term: stand-alone value**
> The value of a business calculated independently, before incorporating the effects of any changes, such as control acquisition or expected combined benefits.

## PRACTICAL CONSIDERATIONS IN ACQUISITION PRICING

When negotiating acquisitions, a buyer must:

- Start from the target’s stand-alone value
- Add an estimate for achievable combined benefits
- Add a control premium if full ownership is sought
- Consider prevailing minority discounts when buying partial stakes
- Factor in illiquidity where applicable

For minority investors, particularly in private companies, lower valuation multiples should be expected due to reduced influence, lower dividend flows, and greater exit difficulty.

### **Revision Tip**

> When confronting an ACCA exam case study, always specify whether the valuation relates to a controlling or minority interest, and justify any premium or discount applied. Clearly distinguish the stand-alone value from anticipated combined benefits.

## **Summary**

Adjustments for control premiums, minority discounts, and combined benefits are critical in practical business valuation and acquisition scenarios. Control premiums compensate for the additional value of decision-making power, while minority and illiquidity discounts reduce the value for small or illiquid shareholdings. Combined benefits should be clearly identified and only included in value calculations when specific and measurable. These adjustments are essential knowledge for ACCA AFM candidates.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain and calculate a control premium and a minority discount in business valuations
- Identify and categorise combined benefit types in mergers and acquisitions
- Adjust business and share valuations for control or minority status
- Assess the impact of illiquidity on private company share values
- Apply appropriate valuation adjustments in acquisition and disposal scenarios

## **Key Terms and Concepts**

- control premium
- minority discount
- combined benefit
- illiquidity discount
- stand-alone value

Adjustments and special cases - Control premiums, combined benefits, and minority discounts