622 Making Key Strategic Decisions
value. This represents the discount an investor would require for buying shares
in ACME instead of an investment that is freely traded.
VALUATION CONCLUSION FOR ACME
Victoria concludes that the fair market value of the common stock of ACME as
of December 31, 2000, was $30,150,000 ($33.5 million less 10% discount for
lack of liquidity).
VALUING MINORITY INTERESTS
The preceding ACME case study valued 100% of the equity (stock) in the
business. Had Bob owned only, say, 25% of the common stock, Victoria would
have to apply some additional analysis to value his minority interest. With a
25% interest, Bob would no longer have the ability to control the company.
Aminority interest is a business ownership of less than 50% of the voting
shares. The owner of a minority interest in most private businesses cannot con-
trol the company. A control interest in a company has the power to direct man-
agement and policies of a business usually through ownership of enough shares
to inf luence voting and other decisions. Intuitively, someone would rather own
a control interest in a private business (51%) instead of a minority interest
(49%) because of the power to control the company. Buyers would typically
pay a significantly different price when comparing a 51% interest to a 49%
interest. This phenomenon is called a discount for lack of control(or minor it y
discount).
The second area of additional analysis for Victoria would be for the typi-
cal difficulty in selling a minority interest in a closely held business. Mar-
ketability is the ability to quickly convert property (an investment) to cash at
minimal cost. Hypothetically, if Bob owns only 25% of ACME’s stock and
someone else owns the other 75%, the number of buyers interested in buying
Bob’s shares is significantly less than if he owns 100%. Since Bob actually
owns the entire company, he has several ways to sell it. For example, he can sell
the company through an investment banker or business broker. He can also
take the company public. If Bob hypothetically only owns 25% of ACME’s
stock, these options are not realistically available to him. Therefore, his minor-
ity interest is less marketable. Intuitively, investors prefer owning marketable
investments over nonmarketable ones. Therefore, buyers of minority interests
in private companies typically pay less since the shares are not marketable.
This is called a discount for lack of marketability.
In valuing a minority interest, a major consideration is the timing and
amount of the anticipated future economic benefits f lowing directly to the mi-
nority owner. This consists of the company’s periodic distributions to the mi-
nority owner and the estimated holding period for owning the equity interest