Minority or control: How to characterize public company cash flows

BVWireIssue #123-2
December 12, 2012

After deriving cash flows from public company data, should BV appraisers consider these on a minority or a control basis? That was the last question to come in from attendees at BVR’s recent webinar on Control Premiums & Discounts. “The answer to that is yes,” said presenter Jim Alerding (Alerding Consulting). ”In some cases, you can consider those [derived cash flows] to be minority, and in some cases, you can consider those to be control.”

For example, Eric Nath (Eric Nath & Assoc.) has pointed out that “public company shares do not trade as minority interests, so he would not add a control premium,” Alerding said. Others might characterize the cash flows way under the market approach—particularly the guideline public company method—but then adjust them using a discount. “It is not an easy question to answer,” Alerding admitted, but depends on the specifics of the subject interest you are valuing as well as how you are using the public company data, i.e., to determine a minority discount, a discount rate, or for some other purpose.

That’s where “the rubber meets the road,” agreed co-presenter James Ewart (Dixon Hughes Goodman). BV analysts need to match the overall discount they are using not only to the underlying assets and their risks, but also to the assets/risks of the comparative data. “Just using general data does not cut it anymore,” Ewart said. “We need to be able to peel the onions back and be able to adequately explain why our interest has the characteristics that are similar to the characteristics of the underlying discount, which is derived from the public data, and be able to match those characteristics up.”

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