Page 34 - Bankruptcy and Reorganization Services

Less than 50% and not in a swing vote position. This is the least influential position for an owner
to be in. The vote of such an owner has little, if any, influence on its own and the bloc is not
large enough for the owner to be courted as a swing vote.

The process of determining the level of ownership and the degree of influence that may or may not be
associated with the ownership interest can be complex, especially given the varying degrees of owner-
ship interests and diverse state and local laws that affect corporate structure and governance. Therefore,
in order to support a lack of control discount or control premium in a valuation report, the valuation ana-
lyst must obtain a thorough understanding of the entity’s business and structure, articles of formation,
regulatory environment, voting rights, and any other relevant information that will provide insight into
how the owners run their business, as well as the external influences that could impact those decisions.
The considerations discussed here are not meant to be all-inclusive. Each valuation engagement will
present unique facts and circumstances, and therefore, it is up to the valuation analyst to assess each en-
gagement independently.

Once the degree of control is determined, the valuation analyst will be tasked with placing a value on
that level of control.

Control Value

As noted, the premium or discount applied to an ownership interest is based on the degree of control (or
lack thereof) an owner has over the direction and management of the company. Control should ultimate-
ly be viewed as a proxy for future cash flows that an owner expects to receive over the term of his or her
ownership. One generally accepted approach that valuation analysts use to determine the amount of a
premium or discount is to initially value the ownership interest as if were a marketable, minority interest
(see exhibit 1). From this point, the valuation analyst would consider what impact the relevant control
features would have on the baseline ownership value (for instance, cash flow considerations, influence
on business decisions, and the like) and adjust upward accordingly. fn 1

Rather than applying an acquisition or control premium to a marketable minority interest value, another
generally accepted approach would be to adjust the cash flow or earnings estimates employed in the val-
uation to reflect the cash flow or earnings that could be achieved by a strategic or control owner. A value
estimate developed employing this approach would also be indicative of either a synergistic or control
value.

In circumstances where ownership interests are initially valued as a control value (this includes control
premiums, usually a pro rata share of total equity value), it may be necessary for the valuation analyst to
reduce the value of an interest that does not have comparable privileges. This could be done through the
use of a minority interest discount and would result in an ownership interest valued as a marketable mi-
nority interest. fn 2 A marketable minority interest, in this circumstance, could also be developed by ad-
justing the cash flow or earnings estimates employed in the valuation to reflect the cash flow or earnings
applicable to a minority shareholder.

fn 1 There are a number of available publications and studies that can assist in valuing a control premium. One highly regarded publi-
cation that is updated quarterly is the FactSet Mergerstat Control Premium Study.
fn 2 As there are for control premiums, there are a number of studies and papers on how to value minority interest discounts. Valua-
tion analysts may also determine that it is appropriate to take the inverse of a control premium and apply it as a discount.

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