A control premium is a premium that a buyer is willing to pay over and above the market price of a publicly traded company to buy a controlling ownership stake in a company. Many models add a percentage premium to the DCF valuation arrived at to account for management control. Is this always a valid approach? Are there occasions, when a control premium must not be added?
A control premium is relevant only if the buyer is able to generate higher cash flows by virtue of controlling the management decisions. If there are no incremental cash flows as a result of control or if incremental cash flows as a result of control have already been baked into the cash flows, the control premium is irrelevant.