The 3 General Types of Valuation Discounts
A valuation discount tackles the subtle differences unique to a business. It involves capturing these specific nuances on a case by case basis.
1. Control Discounts
Such discounts usually consider the difference between a majority and a minority shareholder - or the delineation. Hence they indirectly describe a buyer’s ability to ‘control’ the decision-making process in the business after the transaction.
A major shareholder has more say and more control over the relevant decisions in the business; and hence its share of ownership will be more valuable.
In comparison, a minor shareholder who has little or no say in the relevant decisions, would then be holding a less valuable share of ownership and hence need a ‘control discount’.
However, in the case of a privately owned business, such discounts would become redundant due to the non-existent of such a system of control.
2. Lack Of Marketability
A business owner’s equity interest in large corporations or the stock exchange has access to a market of willing buyers. However, this is less so for business owners of privately owned - closely-held - businesses.
This discount then acts on behalf of these equity interests that have little or no access to a market of willing buyers through comparing it with a similar one that has more liquidity.
This is usually considered an extension of the ‘lack of marketability’ variation discount.
When a willing seller is prevented by any means from going into a transaction with a ready market of willing buyers, this discount can be activated via a ‘buy-sell agreement’, which usually restricts the selling of the ownership of the target business in the open market.
Such an agreement is common in transactions involving privately owned businesses; and it is a way for the remaining shareholders to ‘restrict’ who to come on board.
Generally, this discount is worked out based on the degree of the restrictions placed on the seller to refrain him/her from locating a buyer.
Call us for more detailed information and a 1-hour free consultation.