Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

When 50% is Not Half

You own 50% of a closely-held (not publicly traded) company that has been determined to have a fair market value of $3 million. Your ownership interest is worth $1.5 million, right? Maybe, maybe not. The value of a 100% ownership interest in a business includes the value of “control” – that is, the owner has the ability to control key decisions that affect the business, such as to appoint or change operational management and/or the board of directors; determine management’s compensation; purchase, sell or lease business assets; liquidate, dissolve, sell or recapitalize the company; and determine when and how much to pay out in dividends or distributions. Therefore, the value of your 50% interest depends in part on the degree of control that you have.

One consideration is the distribution of the remaining 50% interest. For example, if it is divided equally among 50 others, your 50% interest could have considerable control, in that it could be fairly easy for you to form a majority by obtaining the cooperation of as little as one other owner. However, if the other 50% interest is also owned by just one person, neither interest is considered a controlling interest. While they are not minority interests either, equal individual interests are usually worth less than a pro rata portion of what the entire company is worth, and the sum of the values of the individual owners is likely less than what the total company could be sold for to a single buyer.

When less than a 51% ownership interest is valued, discounts are applied to arrive at the value of the lesser interest. One such discount is the “minority interest” discount – also known as the “lack of control” discount. This discount is commonly applied to minority interests, or those less than 50%, but it is applicable to any interest that lacks the prerogatives of control that a 100% owner would have.

Obviously, many factors can impact the degree of control a partial owner has over the operations of a company. The degree of control is dependent on the shareholder’s ability to exercise the prerogatives of control – or of the minority shareholder’s ability to exercise negative control by being able to block certain decisions. Whenever a valuation consultant is engaged to value a partial interest, the consultant must determine the extent of any control limitations or opportunities. When any of the control elements are not available to the ownership interest, the value attributable to control must be adjusted accordingly.

By Lynne Bouvea, CPA/ABV/CFF, ASA, CFE