Certified Valuation Analyst (CVA) Practice Exam

What is a key characteristic of a lack of control in business valuation?

1. Ability to influence board decisions

2. Usually not being able to set management compensation

3. Entitlement to dividends

4. Access to insider information

The correct answer is: Usually not being able to set management compensation

A key characteristic of a lack of control in business valuation is typically associated with the inability to set management compensation. When a minority shareholder or an individual who lacks control over the business is involved, they generally do not have the authority to dictate or influence how management is compensated. This aspect is significant in valuation because it reflects the limited ability of minority stakeholders to participate in decision-making processes that could affect the company's operations and financial performance. In contrast, the ability to influence board decisions relates more to having a significant ownership stake or control, which is contrary to the idea of lack of control. Entitlement to dividends can exist regardless of control because shareholders may receive dividends based on ownership percentage, but this does not indicate any control over business operations. Similarly, access to insider information typically pertains to ownership level and involvement rather than control; even stakeholders with inside knowledge may lack the authority to exert influence over the organization. Therefore, the inability to set management compensation serves as a clear indicator of a lack of control in business valuation scenarios.