Controlling Interests in Businesses
February 2023
The International Glossary of Business Valuation Terms defines a “Controlling Interest” as “an ownership interest in a business that conveys the economic benefits of Control to the holder(s) of such interest. “Control” is defined as “a level of ownership having sufficient rights (e.g., voting) to direct the management, policies, and disposition of a business.” “Marketability” is defined as “the ability to quickly convert property to cash at minimal cost”.
Most people recognize that a minority interest in a business that is not publicly-traded (and has sufficient trading volume) suffers from lack of marketability. This lack of marketability results in a lower value than if it was publicly-traded. This lowering of value is called a “lack of marketability discount” or a “discount for lack of marketability”. Fewer people recognize that even controlling interests often suffer from lack of marketability unless they are publicly-traded, and have sufficient trading volume. Since it is usually easier to sell a controlling interest in a business than a minority interest, the discount in value from lack of marketability for a controlling interest is usually lower than that for a minority interest in the same business.
A controlling interest can achieve marketability by either a public offering or a private sale, while a minority interest typically only has a private sale option, or hope that the controlling interest takes the business public at some point.
As stated in Valuing a Business, the following factors need to be considered when determining the lack of marketability discount for a controlling interest:
• an uncertain time horizon to complete
the offering or sale
• Costs to prepare and execute the offering or
sale (legal,
accounting, administrative,
brokerage)
• Risk as to eventual sales price
• Non-cash and deferred transaction proceeds
• Inability to hypothecate
In summary, due to these factors,
it is generally accepted that the
discount for lack of marketability
for a controlling interest should
normally be lower than for a
minority interest in the same
business. This is generally
true as a controlling interest has
more options to achieve marketability.
Relevant Court Cases
-
Fordeley v. Fordeley,
Court of Appeals of Ohio Eleventh
Appellate District,
No. 2021-T-0020,
decided January 30, 2023
-
Harris v. Harris, et al,
Court of Chancery of the State of Delaware,
C.A. No. 2019-0736-JTL,
decided January 12, 2023
Recent Business Valuation Articles
-
“Intangible Value: An International
Perspective,”
by Stefan Vincenz,
dated February 1, 2023
-
“The Influence of Tax Planning,
Dividend Policy and Institutional Ownership
on Firm Value,”
by Muhammad Tafsir,
written January 21, 2023
Recent Engagements
- Valuation of 100% of the common stock of a
niche service firm on a controlling interest
basis for S corporation conversion purposes.
- Valuation of 100% of the common stock
of an industrial products supplier on a
controlling interest basis for corporate
planning purposes.
- Valuation of a limited partnership interest of
an investment holding company on a minority
interest basis for estate tax reporting purposes.
- Valuation of 50% of the common stock of a
real estate holding company on a shared control
basis for gift tax reporting purposes.
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