June 2023
A “portfolio discount” is a valuation discount that is applied, at the entity or minority interest level, due to the holding of disparate assets that as a group are less desirable than if held separately. Portfolio discounts have been accepted by the courts, including the U.S. Tax Court.
For example, a corporation has three lines of business that are dissimilar, but each are worth $10 million if sold separately. The value of the corporation, if sold as a whole, may be worth less than the $30 million total value of the lines of business if one or more of the lines of business would not be desirable to a typical acquirer. Another example is an investment holding company that owns an atypical portfolio of net assets for which it would be difficult to find a buyer. In this case the price that the company sells at as a whole may be lower than the net asset value, representing the portfolio discount.
The portfolio discount is usually higher when valuing a minority interest than a controlling interest. This is due to the fact that a minority interest can’t change the portfolio to make it more desirable to buyers or dissolve and liquidate the company. On the other hand, a controlling interest may take measures to mitigate the portfolio discount by changing the portfolio to make it more desirable to buyers or by liquidating the company.
The size of the portfolio discount varies greatly depending on the facts and circumstances of each case. As stated above, controlling interests generally have lower portfolio discounts applied to them than minority discounts. Alternatively, the portfolio discount can be included in the discount for lack of control, if any, and/or the discount for lack of marketability, if any.
Relevant Court Cases
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In Re Tesla Motors, Inc. Stockholder Litigation,
No. 181, 2022 (Del. 2023) Supreme
Court of Delaware,
decided June 6, 2023
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Marasco v. Marasco,
Court of Appeals of Iowa,
No. 22-0847,
filed June 7, 2023
Recent Business Valuation Articles
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“Extrinsic Value,”
by Caleb N. Griffin,
posted June 4, 2023
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“Mergers and Markups,”
by Vardges Levonyan and Paolo Mengano,
dated May 31, 2023
Recent Engagements
- Valuation of a member interest of a mostly real
estate investment company on a minority interest
basis for estate tax reporting purposes.
- Valuation of 100% of the common stock of a niche
product firm on a controlling interest basis
for potential sale purposes.
- Valuation of 100% of the common stock of a specialty
distributor on a controlling interest basis for
phantom stock purposes.
- Valuation of the voting and non-voting common
stock of an industrial general contractor on a
minority interest basis for gift tax reporting
and purchase/sale purposes.
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