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Minority Report – A discount for disadvantage

July 28, 2016

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This week’s blog post builds on the topic of valuation discounts as discussed in one of our previous posts – if you missed our blog on valuation discounts click here. As explained in this post, valuation discounts generally refer to a reduction from the rateable en bloc value of an ownership interest to recognize certain disadvantages in such an ownership. Building on this, we felt it would be advantageous to discuss in further detail a certain discount known as the minority discount.

The concept of a minority discount focuses on the fact that a minority shareholder in a company does not enjoy many of the same benefits as does a majority shareholder. Perhaps the most important of which is the inability to directly influence operations, economic direction of the investment and the rate of return earned on the investment. This can be interpreted as a lack of control in a company as compared to a shareholder with a controlling interest.

Valuation textbooks often refer to the concept of a minority discount as follows:

The amount by which an interest in a business is reduced from its rateable portion of en bloc in recognition of the inability to unilaterally control the business”[1]

“The amount of percentage deducted from the pro-rata share of value of 100 percent of an equity interest in a business to reflect the absence of some or all of the powers of control.”[2]

“The concept of minority interest deals with the relationship between the interest being valued and the total enterprise. The primary factor bearing on the value of the minority interest in relation to the value of the total entity is the degree of control the minority interest does or does not have over the particular entity.”[3]

In our valuation engagements, minority discounts are considered for purposes of estimating a discount to be applied to the en bloc value of a company’s shares if the above-noted disadvantages exist. However, it is important to note that a minority discount may not always apply and is often determined on a case-by-case scenario. In addition, a valuator’s professional judgment is vital in the determination of a minority discount, if any, as many factors come into play when a valuator undergoes a valuation engagement.

 

 

[1] The Valuation of Business Interests, Ian R. Campbell, Howard E. Johnson, 2001 pg. xviii

[2] ASA Business Valuation Standards, 2009 American Society of Appraisers pg. 26

[3] S.P. Pratt, Valuing a Business (Second Edition), Dow Jones-Irwin (Homewood, Illinois: 1988) p. 59





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