In the United States, the value of a non-controlling interest in a private company is estimated through a specific technique referred to as minority interest valuation. minority interest valuation takes into consideration the fact that owning less than 50% of a company’s voting shares naturally restrains a shareholder’s ability to influence corporate policies, decide on management, and dictate dividend payments.
The basis for this type of valuation rests on making certain modifications to the value of the whole enterprise corresponding to the minority stake. Principally, two major reductions come into play: the Discount for Lack of Control (DLOC) and the Discount for Lack of Marketability (DLOM). These reductions indicate how the value of a share in the company is decreased due to the lack of both decision-making capability and the ease of selling the share on a public stock exchange.
Besides affecting how much gift and estate taxes have to be paid, minority interest valuation comes handy for shareholder buy-sell agreements and court cases. Such valuations are often examined by authorities like the IRS, so providing them with data and methods they recognize is essential. The end result is a value that truly reflects what a typical buyer would be willing to pay for a minority ownership stake under the current market conditions.
