Of all the intrinsic characteristics related to an equity interest, arguably none may be more important than the element of control. Widely accepted theory within the business valuation community holds that an investment in a privately held company is worth the present value of all of the future benefits inuring to the holder of that equity interest.

Clearly, then, if the equity holder has a control position, he or she can accelerate the receipt of those future benefits and via management and operational initiatives, take direct steps to enhance the future benefits, or at least the probability that they will be generated. On the other hand, a minority or non-controlling position in a privately held company is generally held at the great risk of being subject to the judgment, ethics and management skills of the controlling shareholder(s). Depending on a number of items, the impairment of value can be significant in this circumstance.
Control premiums and discounts for lack of control, sometimes referred to collectively as "control adjustments," have enjoyed wide acceptance in the federal tax system. The estate and gift tax regulations on valuing publicly traded stock recognize a basic inequality between controlling and non-controlling interests, noting in Treasury regulation sections 20.2031-2(e) and 25.2512-2(e). "If the block of stock to be valued represents a controlling interest, either actual or effective, in a going business, the price at which other lots change hands may have little relation to its true value." Regulation sections 20.2031-2(f) and 25.2512-2(f) also list as a factor in valuing closely held stock "the degree of control of the business represented by the block of stock to be valued." These provisions prompt swing vote consideration as well. The primary IRS ruling on valuation of closely held shares, Revenue Ruling 59-60, clarifies which way this factor cuts.
The ruling states: "Although it is true that a minority interest in an unlisted corporation's stock is more difficult to sell than a similar block of listed stock, it is equally true that control of a corporation, either actual or in effect, representing as it does an added element of value, may justify a higher value for a specific block of stock." Court decisions and rulings employing minority discounts and control premiums have become the standard over the years, applying these principles not only to stocks, but other types of property as well.