Fair Value of Minority Interest
Business assets are frequently held by multiple owners and the market value of fractional interests is generally discounted from their pro rata share because of impairments in marketability and/or control. Structured entities have rights and obligations that are specified by statute or covenant. Valuation analysts commonly focus on the established voting rights, cash flow distributions, proceeds from asset sales, limitations on liability, and transferability of interests.
Control
The percentage of ownership in any particular business has a significant impact on the value of the subject. A non-controlling ownership interest usually has a lower value than the controlling interest because a minority ownership interest does not have the ability to sell underlying business assets or change dividend and compensation policies. A number of factors affect the value of a minority interest, so the business appraiser must determine if a discount for lack of control is applicable, and then define the appropriate discount rate.
Marketability
Ownership interests are considered liquid if they can be converted to cash quickly with minimal transaction costs. This is marketability. Ownership interests in privately-held companies are considered marketability impaired; therefore, the appraiser must determine the appropriate discount for impairments to marketability, where the level of control influences the scale of the discount. Minority interests are less marketable than controlling interests, so the marketability discount is higher for minority ownership.
