Valuation Principles and How to Increase Value. Do you know which valuation method will help you to increase performance, revenue, profits, and value?
Values of Public vs. Private Companies must Consider the Marketability Discount
Values of Public vs. Private Companies must Consider the Marketability Discount, what is marketability? Marketability relates to how easy it is to sell or buy the company’s stock.
Why would you discount equity stock or units for marketability? If you have publically traded shares, you can buy or sell your stock whenever you want. There is no discount for marketability.
If you are a privately held company, when or how do you liquidate your shares? Typically, only when the owners decide to sell, or you have to seek owner approval to have them buy the shares back. You do not have any control of what they decide to do. Correct?
The marketability discount that would apply is situational. If the owners do not plan to sell or buy the shares then the discount could be 50+ percent. National studies show that a discount ranges should be from 10% to 52% depending on the situation.
EXAMPLE FACTS FOR MINORITY DISCOUNT
Consider the situation below for a discussion of the minority discount.
1. Overall company value after marketability discount is $1,000,000.
2. A purchase of 10% ownership block is considered.
Would $100,000 be a fair value for the 10% ownership block? NO.
Why would you discount company value if you were selling or buying a minority block of shares/units?
One reason may be: LACK OF CONTROL
What does lack of control mean?
The majority owners can complete all actions and transactions without the minority owner’s approval. This is considered a passive – minority shareholder. This block has very little influence on any decisions.
There have been many studies to determine what discount would apply for a minority block. The percentage discount is dependent upon the situation.
For example, a minority block owner that is part of the Board or Officer Group would have more control than a passive-non-involved-owner. This situation would have a discount in the lower end of the range shown below.
The discount studies show a range of 14% to 40%.
To find the current and accurate worth of your business assets it is important that you find a professional asset valuation service. Whether you need to know the value of your business to sell it, for budgeting and accounting practices, for taxes or for an initial public offering, a professional valuation is important. Valuation can also be used for audits and financial investigations as well as tax benefits, and expansion planning.
It is important that you choose a valuation service which is able to accurately evaluate not just your business and what is on the balance sheet but also your assets in any form. You may find that your valuation service does a thorough market value evaluation for your real estate assets, or a projected valuation of copyrights or royalties.
Everything from company vehicles to computers and furnishings are assets, and if you want to have a true and accurate idea of the value of your business it is important that you have a thorough valuation service involved and make sure to include all types of asset valuation.
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