Mergers & Acquisitions

Resources: Glossary

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Discount for Lack of Control

Definition

A discount taken when valuing an interest in a privately held business to account for lack of control, typically due to a minority interest.

Example

If a company is valued at $10 million, a 49% interest may be worth $3 million, while a 51% interest may be worth $7 million. The exact amount of the discount depends on several factors, but a minority interest in a business is worth less than a majority interest on a pro-rata basis, which has a greater degree of control over the management of the business.

See Also

Discount for lack of marketability, valuation discounts.

Tips

Discounts and premiums are commonly used when appraising a company for legal purposes. A minority shareholder lacks control over many elements of the business, including the ability to elect the board of directors, determine compensation and perks for management, declare dividends, set company policies, purchase or sell assets, decide when to sell the company, and dozens of other key decisions. As a result of this absence of control over the business, a minority shareholder’s interest in a business is worth less than a majority of interest on a pro-rata basis. Minority discounts usually range from 10% to 40%.

Related Resources

Business Valuation Methods in a Nutshell