What is a 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.
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.
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