Business Valuations of Minority Interests in Private Company
- Arnold Shields
- Aug 24, 2009
- 2 min read
Updated: Jun 24
In our experience with litigation and business restructuring, the issue of minority interests arises frequently when valuing businesses. A minority interest refers to a shareholding that does not confer control over the entity, typically where the holding is less than 50%.
Lack of Control and Marketability
It is well established that a discount is often applied to reflect the reduced value of a minority interest. This discount accounts for two key factors:
Lack of Control: Minority shareholders generally have limited or no influence over operational decisions, dividend policies, or strategic direction.
Lack of Marketability: In private companies, minority shares are not easily sold, and often, no active market exists at all.
Minority shareholders are dependent on the decisions of controlling shareholders, not only for income via dividends, but also for the long-term value of their investment. Even though minority shareholders may have legal rights, asserting those rights often requires litigation, which is both costly and time-consuming.
Limitations of Empirical Evidence
There is limited empirical data on the actual discount applied to minority interests in private markets. Analysts sometimes refer to takeover premiums of publicly listed companies as a benchmark. However, this is problematic for two reasons:
Public company shareholders enjoy far greater legal protections and transparency.
Public companies are subject to continuous market pressure to distribute profits and enhance shareholder value.
Special Considerations for Other Structures
The conventional minority interest discount may not be appropriate in all cases. Consideration should be given to:
Unit Trusts – where unit holders are entitled to income distributions and not dependent on director discretion.
Professional Partnerships – where control is typically shared across partners, diluting the traditional concept of control.
Single-Purpose Trusts (e.g. Property Trusts) – where income is passive, and the entity holds only a single asset.
Private Companies With No Dividend History – where the economic benefit of ownership has never flowed through dividends.
Valuation Must Be Case-by-Case
Given the lack of reliable market-based benchmarks, each minority interest valuation must be determined on its own merits. Factors that must be considered include:
(a) The entity’s operational and ownership history
(b) The governing documents (e.g. company constitution or trust deed)
(c) Any shareholder, unitholder or partnership agreements
(d) The nature of internal decision-making processes
(e) The historical pattern of dividends or distributions
Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.
