Page 36 - Business Valuation for Estates & Gift Taxes

Synergistic (also known as "strategic" or "acquisition") value is a fourth level that reflects value to a par-
ticular buyer. Because gift and estate tax valuations are prepared using the standard of fair market value,
which does not recognize synergies, this fourth level of value will not be addressed in this practice aid.

Prerogatives of Control

The benefits of control can be wide-ranging and add significant value to interests that have controlling
ownership characteristics. The degree of control by majority owners can have an equally significant im-
pact on the discounts applied to minority owners. For example, in situations in which controlling owners
have the ability to divert more than their pro-rata share of the benefits of the business to themselves at
the expense of the non-controlling owners, the minority interest would have a larger discount as com-
pared to a similar minority interest in which the controlling interests did not have this capability. Other
rights associated with majority ownership include, but are not limited to, the right to the following:

 Appoint or change operational management

 Elect directors

 Change the articles of incorporation or bylaws

 Borrow from, or lend to, the company at rates favorable to the controlling owner

 Negotiate agreements

 Merge with or buy another company

 Set policies

 Declare and pay dividends

 Determine future operational plans

Degree of Control

If an ownership interest has the characteristics of control (that is, it can make decisions that impact the
company’s operations, management, leadership, or direction) then it is appropriate, in fact, necessary, to
consider these characteristics when determining the fair market value of the interest. In most cases, the
ownership interests are likely to have a greater fair market value than they would if those features did
not exist because the future benefit stream is expected to be larger. Between the two levels of control (all
or none), a continuum exists, reflecting factors that can enhance or diminish control and consequently,
increase or decrease the fair market value of an ownership interest. Frequently, the terms non-
controlling interest and minority interest are used interchangeably to describe an ownership interest;
however, this is not always an accurate description. For example, cases in which a 20 percent interest
may be a minority interest and a non-controlling interest, a 50 percent interest may also be non-
controlling but would have the ability to exert more influence than the 20 percent owner (although legal-
ly a minority interest in simple majority jurisdictions). In some instances, the difference could be viewed
as significant enough to be considered a controlling interest. Therefore, it is critical the valuation analyst
carefully consider all the characteristics of the ownership interest.

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