Challenges and Complexities when Valuing Minority Shareholdings in Private Companies
Minority or non-controlling shareholdings in private companies often need to be valued for taxation matters, family law disputes and commercial disputes. Quite often, minority interests are held by shareholders in professional practices, senior managers in private companies and by children or other relations of the principal shareholder in a family company.
The considerations required to value a minority interest in a private company are more varied and dynamic than those considerations required to value 100% of a company or business.
Complications arise when valuing a minority interest in a private company as a result of the fact that minority shareholders generally have little to no control over the management of the company and have little control over what dividends are declared and paid. Further, minority shareholdings are often unsaleable in an open market transaction. Due to these complications, a discount needs to be made when a minority interest is valued.
The considerations required when valuing a minority share in a private company vary significantly from matter to matter, however common factors include:
- The company’s dividend policy: Does the company maintain a dividend policy that dictates when and how dividends are calculated and paid? Does the company have a history of complying with its dividend policy? If the company maintains a consistent dividend policy that it adheres to, the income stream produced for the minority shareholder is key to determining the appropriate valuation.
- Historic dividend trends: It is often said that the past is a good predictor of the future. On this basis, a historical trend to regularly declare and pay dividends in a consistent fashion may indicate that the shares are likely produce a maintainable income stream into the future which will have a direct correlation with the value of the shareholding.
- Shareholder agreements and company constitutions: Under what circumstances can minority shareholders sell their interest? Are there restrictions on how or to whom minority shareholders can divest their shareholding? Mandated holding periods and restrictions on who a minority shareholder may sell their shareholding to are commonplace. When these restrictions exist valuations need to be significantly discounted.
- The financial and operational outlook for the company: As with any valuation of a shareholding, company or business the asset’s financial and operational outlook is a key driver when determining value. If a minority shareholding is held in a company with poor future prospects the valuation will be significantly lower than that of a minority shareholding in a fast growing, strong performing company.
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At Quinn M&A, we have significant experience and expertise in the complexities of minority shareholding valuations and frequently provide advice on these matters to other professionals including accountants and solicitors.
Should you require advice on minority shareholding valuations, or if you require an expert valuation report for a legal or taxation matter please contact us on 02 9223 9166 or submit an online enquiry for a confidential conversation.
The Quinn M&A team look forward to working with you