5.2 Discount for lack of control (minority discounts)
One of the major goals of a business valuation report is to conclude on the fair market value of all the common shares of a company. This is usually referred to as the “en-bloc” value. The valuation engagement however may require the CBV to opine on the value of a group of shares that is less than 100%.
The CBV will be required to analyse what rights accrue to the group of shares being considered. In a simple situation, with no shareholders’ agreement in place, a block of 80% of the shares will have almost unfettered control. Conversely, the 20% block will have very limited influence on either the day to day activities of the company or the bigger issues, such as major changes to the business.
If the 20% block has never received a dividend, has no influence on the composition of the board, and there is little prospect of the 20% shareholders receiving any liquidation proceeds, it could be argued that the block has extremely little value. A large discount for lack of control would therefore be applied by the CBV in concluding a value of the 20% block.
A minority share in a business is seldom worth the same – pro rata – as a controlling share.
However, corporate affairs are seldom that simple. Shareholders’ agreements are often in place and, among other issues, lay out the rights of all classes of shareholders in respect to their effective influence over the flow of cash within and out of the company. The minority shareholders can therefore see how, in concrete terms, they will realise a return on their investment. It may be limited to a predictable dividend or it may relate to employment opportunities.
Even without a shareholders’ agreement, a history of consistent dividends will provide support for some value, likely based on the amount of the dividends and alternative yields. A detailed analysis of the specific circumstances will show what, if anything, the CBV can use to support a valuation conclusion, although some precedents may need to be found to support the size of the discount.
In marital cases, the principle of “fair value” usually requires that shares in a family-owned company be treated equally. The instructions provided to the CBV will frequently include a directive that no discount be applied to the value of the shares held by the minority shareholding spouse.
Contact MVI for a more complete understanding of how value can be found in minority shares.