Minority interest valuations
Lotus Amity provides minority interest valuations in private companies. The minority interest valuations are often required in acquiring or issuing shares, in shareholder disputes and employee share schemes.
A minority shareholder in a private company can potentially suffer from several key disadvantages, including:
- Inability to influence the direction of the company and future investment
- Inability to influence the financial operations of the company, including, for example salaries paid to controlling owner operators
- Inability to influence the distribution of profits as dividends
- Inability to influence the sale of the business and other assets of the company
- Limitations on the transfer and pricing of shares per the constitution and or shareholders agreement
- Limited market with few potential buyers
Minority interest discounts
The two key discounts that valuers often refer to in minority interest valuations are the DLOC and DLOM:
- Discounts for Lack of Control (DLOC). Per the International Valuation Standards, Discounts for Lack of Control are applied to reflect difference between comparable companies and the subject business regards to the ability to make decisions and changes that can be made because of exercising control. Minority interests usually have no control and can not influence future cash flows.
- Discounts for Lack of Marketability (DLOM). Publicly traded shares can be bought and sold nearly instantaneously, while minority shareholding in a private company may require a significant amount of time to identify potential buyers and complete a transaction.
Approach and resources
When preparing minority interest valuations, we analyse any disadvantages that may influence the future cash flows available to the shareholder (such as controlling owner expenses), the likelihood and amount of future dividend distributions and a 100% business sale, any limitations in the constitution and or shareholders agreement, the number and holdings of other shareholders, and past shareholder transactions and volume. We may also consider the Restricted Stock Studies, IPO studies, bid-ask regression and provide option price modelling to quantify the lack of liquidity.
Useful resources in relation to minority interest valuations include:
- Valuation of Partial Ownership Interests – American Society of Appraisers Procedural Guidelines PG-2
- Valuing minority interests by the excellent and esteemed Eric Nath
- The Stout Restricted Stock Companion Guide
- My minority interest and control premium blogs!
Experience
Examples of previous minority interest valuations include the following:
- Valuation of a minority interest in a concrete manufacturing group. Key issues included significant demand growth and non operating land holdings, price elasticity to demand, closure of plants and impact on volume, potential licensing issues, customer concentration, market share, significant future capital expenditure, and joint venture investment. Group valued using weighted Income and Market Approaches. Under the Income Approach cash flows modelled under different scenarios. Under the Market Approach guideline Australian public companies and transactions considered. Minority interest valued after considering the pre-emptive rights per the articles of association and transfer price restrictions and transfer restrictions per the shareholders agreements, dividend distribution history, modelling a discount for lack of marketability using an option pricing model to reflect holding costs and restricted stock studies.
- Valuation of a minority interest in a company developing and providing software platforms in the waste and environmental services sector. Valuation report prepared for the administrators of an estate, with a value at the date of death and at the current date. Lotus Amity analysed monthly revenue and profitability growth, dividends as percentage of after-tax profit, closing cash balances and working capital requirements and used a DCF Income Approach and Market Approach to value the interest.
- Valuation modelling of a minority interest in a quarrying group. Model prepared for the group to assist in pricing the interest held by a leaving shareholder. The model considered the monthly revenue and profitability, dividends as percentage of after-tax profit, capital expenditure, surplus land and properties, joint venture investments and modelled future cash flows and a discount rate.
- Valuation of the ordinary shares in a superannuation management, administration, advisory and promoter group. Valuation prepared to assist in the valuation of the options per the employee share option plan. The group included recent business acquisitions, preference shares, options, convertible notes, recent capital raises and more than a hundred shareholders. Lotus Amity analysed the investment and management agreements, the business acquisitions and capital raises, preference share terms and share transfers, past and forecast FUM, revenue and profitability, expense composition, cost reduction strategy and industry benchmarks. To value the business, post-acquisition proforma revenue, margins and liquidity and discounts rates were modelled using a DCF income approach and guideline publicly traded companies, comparable transactions and prior transactions were considered under a market approach. To value the ordinary shares, the values and impact of the preference shares and options were modelled and deducted.