Read more on value of control and the illiquidity discount
Value of control
If you do a valuation right, there
should be no need to apply discounts and premiums for most items
to the estimated value. Consider the widely applied private company
discount in the valuation of publicly traded companies. The rationale
is that discounted cashflow valuations assume that a firm is
optimally managed and most firms are not. This is patently absurd
since the analyst chooses the inputs that go into the discounted
cashflow valuation. If a firm is poorly managed with a sub-optimal
debt ratio and a low return on capital, the discounted cashflow
valuation with these inputs will already reflect the poor management.
Consider also the premium that is often applied for control.
To value control, all you would need to do is re-value the firm
with optimal management and the difference between this value
and the status quo value should be the value of control.
Liquidity is a tougher problem. All
investments are illiquid, but to varying degrees; for publicly
traded firms, it takes the form of a bid-ask spread and for private
firms it takes the form of a discount on estimated value. The
key is to be discriminating. Not all private companies are equally
illiquid. Applying a rule of thumb (25-30% is widely used) strikes
us as inappropriate.