Valuing a minority interest

Understanding Minority Interest Valuations

Valuing a minority interest in a private company is often considerably more complex than simply applying a percentage ownership to the overall business value.

A minority shareholding generally refers to an ownership interest that does not provide effective control over the operations, decision-making, dividend policy or strategic direction of the company.

In many private company valuation matters, the value of a minority interest may be significantly less than the pro-rata value of the entire entity due to the absence of control and limited marketability.

At BRV Business Valuations, we provide independent minority interest valuations for:

• Family law proceedings
• Shareholder disputes
• Partnership disputes
• Taxation matters
• Succession planning
• Buy/sell agreements
• Estate and probate matters
• Commercial litigation
• Business restructuring

You may also find these pages helpful:

• Business Valuation Specialists
• Business Valuations for Shareholder Disputes
• Family Law Business Valuation
• Expert Business Valuations

What Is a Minority Interest?

A minority interest exists where a shareholder does not possess sufficient ownership rights to control the company.

This often applies where the shareholder owns:

• less than 50% of issued shares
• non-voting shares
• restricted share classes
• passive investment interests
• interests subject to shareholder agreements

The commercial reality is that minority shareholders frequently have limited ability to:

• influence management decisions
• appoint directors
• control dividend distributions
• approve business strategy
• force a sale of the business
• access liquidity for their shares

Accordingly, minority interests are often subject to valuation discounts.

Discount for Lack of Control (DLOC)

A key consideration in valuing a minority shareholding is the:

Discount for Lack of Control (DLOC)

This reflects the reduced value attributable to the absence of control rights.

The DLOC recognises that minority shareholders typically cannot:

• control management
• determine remuneration
• influence dividend policy
• approve major transactions
• direct future strategy
• force liquidation or sale

The appropriate level of discount depends heavily upon the specific facts of each case.

Discount for Lack of Marketability (DLOM)

Private company shares are generally not readily saleable in an open market.

This gives rise to the:

Discount for Lack of Marketability (DLOM)

A minority interest in a private company may be difficult to sell because:

• there may be no active market
• transfer restrictions may exist
• shareholder agreements may limit transfers
• purchasers are often limited
• information asymmetry may exist
• liquidity is limited

The DLOM reflects the commercial difficulty associated with converting the shareholding into cash.

How Discounts Are Applied

In many valuation matters, DLOC and DLOM are applied sequentially rather than combined together.

For example:

• Pro-rata share value: $200,000
• DLOC of 15% reduces value to $170,000
• DLOM of 10% further reduces value to $153,000

This methodology is commonly applied in minority interest valuations.

Factors Affecting Minority Interest Discounts

There is no fixed formula for determining minority discounts. Each valuation must consider the specific commercial circumstances of the company and shareholder.

Important considerations include:

Shareholder Agreements

The terms of the shareholder agreement can significantly impact value, including:

• pre-emptive rights
• drag-along rights
• tag-along rights
• compulsory acquisition clauses
• dispute resolution provisions
• dividend entitlements

Voting Rights

The practical influence of the shareholder is critical.

For example:

• a 49% interest may still possess significant blocking rights
• a 10% interest may have virtually no influence
• special resolution thresholds may affect value

Dividend History

A consistent dividend-paying history may improve minority share value.

Conversely, companies retaining all profits may reduce attractiveness to minority investors.

Nature of the Business

Factors influencing value include:

• profitability
• recurring revenue
• owner dependency
• industry risk
• customer concentration
• management depth

Relationship Between Shareholders

The commercial relationship between shareholders may substantially impact value, particularly in shareholder disputes or family businesses.

Indicative Minority Interest Discount Ranges

While every valuation matter is unique, the following broad ranges are sometimes considered:

These ranges should never be applied mechanically and must always be assessed in light of the specific circumstances of the business and shareholder.

Minority Interest Valuations for Family Law

Minority interest valuations commonly arise in family law proceedings where one party owns shares in a private company.

Issues often considered include:

• effective control
• shareholder rights
• transferability
• future maintainable earnings
• dividend policy
• related-party transactions

BRV regularly prepares independent valuation reports for family lawyers, mediators and the courts throughout Australia.

Related services:

• Family Law Valuation Experts
• Professional Practice Valuations
• Business Valuation Process

Why Choose BRV?

Since 1986

Extensive experience valuing private companies and minority shareholdings across a wide range of industries.

Independent & Commercially Focused

Objective valuation analysis supported by recognised valuation methodologies and commercial reasoning.

Australia Wide

Providing minority interest valuations across Perth, Sydney, Melbourne, Brisbane, Adelaide and regional Australia.

Experienced in Litigation Matters

Valuation reports prepared for:

• Family Court matters
• shareholder disputes
• expert witness proceedings
• taxation disputes
• commercial litigation

Speak With an Experienced Business Valuer

If you require an independent valuation of a minority shareholding or private company interest, contact Lee Goldstein at BRV.

Call 0414 252 032 for a confidential discussion.