Page 35 - Bankruptcy and Reorganization Services

Noncontrolling Value

Ownership interests not large enough to control operations or make other decisions that affect the com-
pany both operationally and legally are generally considered minority or noncontrolling interests. A
noncontrolling interest is typically worth less than a controlling interest due to the diminished rights and
ultimately a reduced interest in future benefit streams. The adjustment to reflect this decrease in value is
known as a minority interest discount or discount for lack of control.

A minority interest discount is calculated as the inverse of a control premium. For example, if the minor-
ity value of a stock is $1 per share and an acquirer pays $1.25 per share to buy control, they have paid a
25% premium over the minority price. This 25% premium converts into a 20% minority interest dis-
count as follows:

Exhibit 2

1 – (1/1.25) = 1 – .80 = 20% discount for lack of control

To adjust the $1.25 control value to a noncontrolling marketable value:

Control Value $1.25
Discount for
Lack of Con-
trol:
20% (.25)
Noncontrolling
Value $1.00

Discounts for Lack of Marketability

Numerous empirical studies have been conducted that establish a base from which lack of marketability
discounts for minority interests can be calculated. The most commonly used studies are known as re-
stricted stock studies. Restricted stock studies calculate lack of marketability discounts as evidenced by
transactions of restricted stock. In essence, the studies compare the prices at which transactions of re-
stricted stock are executed with the transactions of the restricted stock’s freely traded counterpart. The
percentage difference between trades of restricted shares and their freely traded counterparts is then used
as a frame of reference from which practitioners can estimate lack of marketability discounts.

By way of example, suppose a valuation analyst derived a value estimate by employing the guideline
public company method, fn 3 and the standard of value is fair market value. In general, a value estimate

fn 3 For the purpose of simplicity, our example will assume that the size and financial and operating characteristics of the public
guideline companies are sufficiently similar to the subject company so that size, financial risk, or business risk adjustments are not

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