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What is a Minority discount?


Minority Discount

Minority discounts relate to the value of a particular shareholding interest in a company where the pro rata value of a particular shareholding interest is discounted to reflect the relative lack of control over the company's operations. A discount for illiquidity may also be applicable in these circumstances. The discount for illiquidity generally relates to a minority position in a private company, which may be less saleable than the en bloc (i.e. 100%) equity.  For clarity, it should be noted that the en bloc value of a privately-held company already reflects a discount for the illiquidity of private company shares however it can be argued that a minority share position in a privately-held company is still less liquid than a controlling position in a privately-held company therefore a further discount may be warranted. 


These two discounts, the discount for lack of control and the discount for lack of liquidity, are often combined into one minority discount.  


Example:

Assume that there are 100 outstanding voting common shares in a hypothetical company that are collectively valued at $100,000.  This $100,000 is referred to as the en bloc value of the company's shares, which is 100% of the equity value.  Further, assume that a minority shareholder owns 25% of the outstanding shares.  The pro rata (rateable) value of the minority shareholder's position would be $25,000 ($100,000 x 25%).   However, under the fair market value definition we would need to assume potential discounts to the pro rata $25,000 value.  These potential discounts to pro rata share value would be for a discount for a possible lack of control and a discount for possible lack of liquidity (often collectively  referred to as the minority discount), as we discussed above.