ILLUSTRATION 13.6: Estimating the Minority Discount
Assume that you are valuing Kristin Kandy, a privately
ownedcandybusinessforsaleinaprivatetransaction.You
haveestimatedavalueof$1.6millionfortheequityinthis
firm, assuming that the existing management of the firm
continuesintothefuture,andavalueof$2millionforthe
equity with new and more creative management in place.
65
To estimate thevalue a majority stake (say 51%) of this
value, we would use the latter value:
Tovalueaminoritystakeinthesamefirm,wewouldusethe
status quo value:
Notethata2%differenceinownershiptranslatesintoalarge
differenceinvaluebecauseonestake(51%)ensurescontrol
and the other does not.
CONCLUSION
Thevalueofcontrolinafirmshouldlieinbeingabletorun
thatfirmdifferentlyand better. Consequently,thevalue of
controlshouldbegreaterin poorlyperformingfirmswhere
the primary reason for the poor performance is the
management. In this chapter, we first considered how the
management of a firm can affect its value and then the
likelihood that incumbentmanagement in the firm canbe