Looking back: take special care when determining minority discounts

BVWire–UKIssue #34-2
January 18, 2022

An article by Andrew Strickland and Bob Dohmeyer, originally published in Business Valuation Update, has become the basis of a new business valuation training course developed for the US-based group NACVA.

The course considers the “Misuse of Bid Premium Data to Determine Minority Discounts.” One example of this misuse Strickland and Dohmeyer prepared compares the control status of three different small enterprises:

  • Company A—Diverse shareholder group, no subgroup has control, management team has no control, like a public company, no discount for lack of control required, liquidity discount required.
  • Company B—Control resides with management, company is run optimally, no evidence that minority shareholders receive a minority rather than a majority of cash flows. If this situation continues, no discount required if tenuous and might not continue. A minority discount should be applied. DLOM required.
  • Company C—Control resides with management, take advantage of perquisites of control, with enhanced compensation, employment of ineffective family members, minority shareholder has no access to majority cash flows, minority holding should be determined by reference to minority cash flows but no further need for a discount.

Each of the three companies has a different minority discount perspective. “As can be seen, one of the most difficult areas of BV is to value fractional interests in private companies,” the authors concluded in BVU.

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