Within the valuation community the trend has been to refer to “minority” interests as non-controlling interests. The issue is really whether an owner has control, not how much of a company he owns. In determining whether an interest is in fact a controlling or non-controlling interest I consider both the rights granted by agreement and by law, as well as what goes on in the business.
Some of the benefits of having control include:
- The ability to elect directors and appoint management
- Determine management compensation and benefits
- Set policy and change the course of business
- Acquire or liquidate assets
- Make acquisitions of other companies
- Liquidate, dissolve, sell out or recapitalize the company
- Sell or acquire treasury shares
- Register the company’s stock for public offering
- Declare and pay dividends or make distributions to owners
- Change the articles of incorporation or bylaws
While some owners feel that control over dividends or distributions is one of the most important aspects of control, it is not the only aspect which can impact ownership.
In evaluating whether an interest is controlling or non-controlling, I consider how much not having these benefits impact a non-controlling interest. A few examples may illustrate when a non-controlling interest could be impacted:
- A partnership receives an above market offer for a piece of real estate it owns. The partner who wants to sell owns 51%. However, the partnership agreements provides that in order to sell the assets, at least 75% of the ownership must agree to the sale. The other partners owning 49% refuses to sell. The opportunity may be lost because the 51% partner does not have control.
- A 10% shareholder works for a company. He has been paid a salary in the past. However, his position and salary are eliminated by the management of the company. He remains a shareholder, but does not have the control necessary to reinstate his position or pay himself a salary.
- An S Corporation, which passes through its income to its shareholders, had profits, but management refuses to disburse money for the owners to pay taxes. The shareholders agreement says that management at its sole discretion will determine annual distributions. A non-controlling shareholder cannot force a distribution.
These situations represent real life scenarios where controlling shareholders have been at a financial disadvantage as a result of their lack of control. In some cases, owners who have more than 50% of the equity may still not have control. In others, shareholder agreements can give owners with less than 50% ownership control over a company in the form of being appointed as management, the right to hold seat(s) on the board or by virtue of by other shareholders not having voting rights.
In general, non-controlling interests are worth less than controlling interests. Depending upon the standard of value and purposes of the valuation, a discount for lack of control may apply.
©2010 Florida Business Valuation Group
