Values of Public vs. Private Companies must Consider the Marketability Discount

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 range should be from 10% to 52% depending on the situation.

Minority Discount

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 of 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%.

 

Values of Public vs. Private companies must consider the Marketability discount by Dale Richards. Judd, Minneapolis, said that the key business concepts from Dale Richards’ presentation on Business Valuation Principles – How to Increase Your Business Value, Financially, Operational and Strategically. were valuable for him and his CPA firm.