Valuation : Question 17
When valuing a companys shares, should minority shareholders be factored in? What sort of discount should be applied? Do you have any examples of actual valuations?
It all depends on the context. There may be a shareholders agreement which makes provision for the application of a minority discount or not, depending on the initial intentions of the parties or the balance of power between them.
If the shareholders agreement is silent on this issue, a transaction involving a minority (even a very small minority) will be valued on the basis of share price since such a transaction will be based on comparable listed companies, which could mean a few shares or a few thousand shares. Accordingly, it already includes a minority discount.
Similarly, a valuation of the controlling majority based on comparable transactions will include a majority premium. If you wish to use this method, it may be useful to neutralise this control premium, which is generally around 25%.
Finally, if you use the discounted cash flows method, there are those who claim that this is a method to value majority stake. I dont hold this view as the minority shareholder, in countries where corporate governance is a reality, has a share in free cash flows and the majority shareholder cannot appropriate more than his share. Accordingly, I believe that applying a minority discount to this share serves no purpose.
A minority discount is the discount that the minority shareholder must bear for transforming its shareholding into cash. This can happen when a stock is listed. During IPOs, the discount between the listing price and the price reached once the share is trading in equilibrium is around 10/15%. This is a good point of departure for putting a figure on the minority discount. The tax authorities regularly accept discounts in the region of 20/25%.
For more information, see chapter 32 of the Vernimmen.
If the shareholders agreement is silent on this issue, a transaction involving a minority (even a very small minority) will be valued on the basis of share price since such a transaction will be based on comparable listed companies, which could mean a few shares or a few thousand shares. Accordingly, it already includes a minority discount.
Similarly, a valuation of the controlling majority based on comparable transactions will include a majority premium. If you wish to use this method, it may be useful to neutralise this control premium, which is generally around 25%.
Finally, if you use the discounted cash flows method, there are those who claim that this is a method to value majority stake. I dont hold this view as the minority shareholder, in countries where corporate governance is a reality, has a share in free cash flows and the majority shareholder cannot appropriate more than his share. Accordingly, I believe that applying a minority discount to this share serves no purpose.
A minority discount is the discount that the minority shareholder must bear for transforming its shareholding into cash. This can happen when a stock is listed. During IPOs, the discount between the listing price and the price reached once the share is trading in equilibrium is around 10/15%. This is a good point of departure for putting a figure on the minority discount. The tax authorities regularly accept discounts in the region of 20/25%.
For more information, see chapter 32 of the Vernimmen.