Nonmarketable Minority Interest: Total Discount = 1 - [(1 - DLOC)(1 - DLOM)]

[GothamSenator]

Hey folks,
I’ve seen this pop-up at various times on the forum, but I can’t find the answer I’m looking for at the moment. So apologies for any redundancies and many thanks for feedback in advance.
Example 7 on page 39 of CFAI text Volume 5 illustrates the calculation of nonmarketable minority interest which as we are familar can appear in the context of private company valuation in the equity readings or, as is the case here, in discussions related to PE/VC valuations. I’ve seen questions as to why in both sections which seems fairly straightforward to me. Six of one half a dozen the other, both contexts are addressing the very same issue…
For convenience, I’ve typed out the example and my question below:
CFAI Volume 5, p.39
Example 7
A Nonmarketable Minority Interest
[question removed by admin]
Conceptually this concept is super easy. Clearly, I’m missing something/making this a lot more difficult than it is. An assist would be much appreciated.

 

[cpk123]

Assuming 80% = control premium would be true if Smith were the only investor. Smith has only a 10% interest - so that would not be a reasonable way to do it, is what I think.

 

[GothamSenator]

cpk123 wrote:
Assuming 80% = control premium would be true if Smith were the only investor. Smith has only a 10% interest - so that would not be a reasonable way to do it, is what I think.

Thanks. Do you have any insight into reconciling between the formulaic approach we saw at Level II and the one presented above?

 

[cpk123]

unless they provide a right DLOC number (a control premium number) the two would be off .. as you found with 29.17 vs 30%.
Stick to what is in the book. And remember this is not for the purposes of company valuation, but for a portion of a company that is on an individual investor’s portfolio - what value does the investor ascribe to it, vs. what an outside investor would consider a fair value for that position.