Valuing a minority ownership of a private company

If you look at the public capital markets such as NYSE or NASDAQ, the day-to-day prices are for non-controlling business ownership interests, usually a small number of shares. In other words, these per share prices represent the minority price.

If you want to acquire a controlling share of the company’s stock, you will have to pay a premium over the market price per share of stock. This is what usually happens in a tender offer.

Statistics on control premia paid are readily available by industry sector. Usually, these premia fall somewhere between 30% and 40% over the market share price. This means that the buyers have to pay about 35% over the per share price on average to get a majority stake in a public company.

The minority discount is the opposite of control premium. If you know the value of the entire business, then a minority interest is worth less than its pro rata share of the total.

Why is this so? Let’s say you are a private company co-owner who has, say, 10% of the total company stock. You don’t control the company operational or financial policy. You can’t set management salaries or benefits by yourself. The board can decide to distribute the money to other owners who work in the business as bonuses so you can can miss on dividend payouts. In other words, you have little say in the company.

So your position in the company with the minority ownership stake is not very strong. This affects how much your ownership interest is worth in relation to the overall business value.

Private companies are usually valued on a business enterprise basis. That makes sense if you consider the fact that private companies usually sell as a whole, not piecemeal.

Let’s say you gather some data on the business selling prices for companies similar to yours. You can develop valuation multiples from these prices and known financial performance factors for sold firms, such as revenue, EBIT or EBITDA, assets and owners equity.

Using the multiples you can calculate an estimate of the business value for your company. This gives you the total business enterprise value. Now to evaluate a minority interest in the business you would apply a discount. For example, if a pro rata share of the business is worth $1,000,000 based on the total business value of $10,000,000; then a 10% minority stake at 35% discount would be worth $650,000.

See Valuation Tour