Considerations to take when Valuing Minority Shareholdings
A minority shareholding is any non-controlling interest in a company. Due to being non-controlling in nature, they are less saleable than majority shareholdings. Often they will need to be valued for tax purposes, commercial disputes, in family law matters and for the sale and purchase of shares.
To appropriately determine the value of the shareholding, a number of key considerations must be assessed. These are discussed below.
Activities and Performance of the Company
Many of the detriments associated with owning a minority holdings are less detrimental when the company has poor financial performance or little value on its own. When assessing the value of a minority interest it is vital to investigate whether the company is in good shape and if its financial performance is likely to improve or decline in the future. If a minority shareholding is held in a company with a poor financial outlook then this will have a significant impact on the value of the shares.
Company Constitutions and Shareholder Agreements
There are many potential inclusions within a company constitution that impact the nature of a minority holding. These include clauses covering:
- Whether one class of shares holds more value than others;
- Dividend policies;
- Share valuation formulas;
- Restrictions on the sale of shares, and;
- Voting rules.
Dividend Policies
Some companies have stable dividend policies meaning shareholders can earn a reliable income stream. This can assist in minimising the impact on the overall value of shares from the lack of control inherent in minority shareholdings. It is important to take into consideration the income earnt by the shareholding and whether it is reliable or not.
Shareholder Base
Some companies have a large number of equal shareholders who all hold a minority interest. In such circumstances, the discount applied to the value of the shareholdings is normally less than circumstances when there is a small minority shareholder in the shadow of a major controlling shareholder.
Saleability of Shares
Minority shareholdings are normally not as saleable as controlling interests in a company, meaning they typically take much longer to sell and buyers are more difficult to find. Banks are much less likely to take security over minority interests in private companies when compared to controlling interests. However saleability can be dependent on the nature of the business. For example, a minority shareholding in a professional practice will often be more saleable than a minority share in a manufacturing company.
Find Out More
At Groves & Partners, our expert team of business valuers have experience conducting complex minority shareholding valuations. If you require advice on minority shareholding valuations, please contact us on +61 2 7208 7970 or email info@groves.com.au.