The small stock premium is the concept of increasing the discount rate, to make specific allowance for the relative size of the entity being valued, by reference to size data from the public markets.
This has become deeply embedded in parts of the business valuation community. This is notably the case in North America. The reasons are clear: the USA is the source of most of the small cap studies; it is also an environment in which computation is generally preferred over qualitative methods.
The UK is far from immune from this thought process; it appeared in the two cases of Gul Bottlers v Nichols plc and Gray v Braid Group (Holdings) Limited. In both of these cases the discount rate was increased by 11.65%, representing the premium returns experienced by the smallest listed US companies.
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