USES OF VALUATION DISCOUNTS IN BUSINESS VALUATION

September 21, 2018 | Author: | Posted in Communications

here are two primary instances in which Valuation Discounts are used. These include entity or shareholder level discounts. Entity-level discounts affect the business as a whole while the shareholder level discounts affect certain ownership interest holders.

DISCOUNT FOR LACK OF CONTROL

When estimating the value of an ownership interest, typically controlling ownership interests sell at a higher value than non-controlling ownership interests. There are many reasons as to why a controlling interest in a business is generally worth more on a pro-rata basis than a minority position. Generally a controlling interest can confer the rights to the following:

  • Elect directors
  • Select and/or remove management
  • Dictate dividend policies
  • Determine compensation and benefits
  • Acquire and sell assets
  • Determine corporate strategy and long-term goals
  • Acquire other companies or merge with other companies
  • Revise articles of incorporation and bylaws

DISCOUNT FOR LACK OF MARKETABILITY

Owners of closely held businesses are affected by the inability to readily convert their investment into cash. The term discount for lack of marketability is a general term referred to in Business Valuation for the impairment of value for reasons relating to liquidity. There is no quantitative formula to apply a discount for lack of Marketability to a privately held company. A valuation analyst will review several aspects of the business and organizational documents to determine if a discount for lack of marketability is appropriate. Some of the factors that can impact the marketability of a company are listed below:

  • Put Rights or Buy/Sell Agreements
  • Dividend/Distribution history
  • Recent offers to purchase the company
  • Ownership block size
  • Stock transfer restrictions
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