Valuing a minority ownership interest in a small business is one of the more nuanced challenges in business appraisal. While the overall value of the company is important, a minority interest (less than 50%) valuation will consider additional factors that can significantly impact value.
Regardless of the minority interest percentage being appraised, you must first determine the total value (100%) of the business as a going concern. Once this is established, the next step is to determine the value of a fractional ownership interest, recognizing that minority shareholders typically lack control over key business decisions. Two key discounts will generally apply when valuing minority interests: Lack of Control and Lack of Marketability.
Lack of Control considers that a minority owner cannot set salaries, declare dividends, sell the business, or make strategic decisions. Because of these limitations, buyers usually pay less for a minority interest compared to a controlling interest.
The Lack of Marketability discount reflects the fact that the company is not public and that small-business ownership interests are more illiquid, meaning there is no immediate, ready market to sell them. This discount reflects the additional difficulty and time required to convert that ownership into cash.
Together, these discounts can materially reduce the value of a minority interest compared to a pro-rata share of the company's total value.
The purpose of the valuation may influence how these discounts are applied. For example, in estate and gift tax valuation, the IRS typically recognizes appropriate discounts if properly supported. In shareholder disputes or buy-sell agreements, the level of control and the agreement's terms may determine whether discounts are allowed or excluded. In divorce or partner buyouts, state laws and court precedents can affect how minority interests are valued.
A qualified appraiser should carefully consider the legal and practical context before applying any discount.
Valuing a minority interest blends quantitative analysis with informed professional judgment. Appraisers must understand both the numbers and the realities of private business ownership. A well-supported valuation not only withstands scrutiny from courts, auditors, or the IRS but also provides minority owners and their partners with a fair, transparent basis for negotiation and decision-making. Working with an experienced certified business valuation professional ensures that these potential discount factors are properly addressed and the result reflects true economic reality.