Valuation : Question 17
When valuing a company’s 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 don’t 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.