Minority Interest and Company Value
“Ok, so now I know what the value of my business is, what are my shares worth?” This is a common question asked by shareholders. The answer may be surprising. Your shares may be worth less on an individual owner basis that the value per share of all the shares.
There are two things at play here: control and liquidity.
In every company, there are majority interests and minority interests. A majority shareholder is the shareholder who owns most of the voting shares. Anything less than a 50% holding in the voting shares is known as a minority interest.
Control: Who Decides!
First control: The size of your shareholding determines your ability to control the economic destiny of the company. If you own all the issued securities of the company, then you get to make all the decisions, and reap all the rewards and risks of doing so. But if you own less than 50% of the shares, then your pro rata (aka percentage) share in the value of the company may be worth less because you don’t have any control and the value of your business interest is subject to the decisions made by the shareholders who have the majority (control) of the votes.
Liquidity: Who Buys!
Second liquidity: Unlike a public company, a private company has no ready market in which shareholders can buy and sell shares. In general, the value of a business is related to its liquidity. Liquidity is determined by the number of participants in the market. The greater number of buyers and sellers, the greater the number of transactions and the more liquid the market.
Typically, when a private company is sold all of its voting shares are sold at the same time. The minority interest shareholder is dragged along with the majority. But the minority interest shareholder is unlikely to transact on their own. There may even be corporate by-laws or rules preventing the sale of minority interest shares without the approval of the majority interest shares. And lastly, there are even fewer participants in the market willing to buy a minority interest.