Discounts in Valuation

From Wikicpa

Lack of marketability

Lack of marketability is defined as the absence of a ready or existing market for the sale or purchase of the asset being valued. Factors to consider in determining the amount of the discount are:

Restrictions imposed by the business entity
Restricitons imposed by Federal, State or Local laws
Comparision of market prices of publicly held companies
Ownership selling costs not limited to broker's commissions and underwriter's fees.

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Lack of control

Lack of control is also known as the Minority Interest discount. A minority interest in a business entity is ownership of an amount of stock that does not enable the holder to exercise control. This is generally ownership of less than 50%. The 50% baseline does not always apply due to the other factors specific to each case:

The articles of incorporation may require a specific percentage to make decisions.
A minority block of stock may be swing vote.
In an entity where there are three shareholders, each owning one-third of the stock, no one shareholder has control.

The primary factors to be reviewed in determining the amount of a minority discount are:

Is the investment income dependent on decisions over which the minority sharholder has no material control
Are there comparable sales of minority blocks compared to sales of majority blocks.
The actual size of the ownership block
Is the company as high or low risk business
The relationship of the minority owners participation in the day to day business activities.

Court cases and the IRS have cited minority discounts as acceptable in the range of 10% to 65%.

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