Discount for lack of marketability and control
Over the years I have
been asked to calculate discounts for lack of marketability and control for
minority business shareholder buy backs. It bothers me that business owners in
need of operating capital for their business will sell minority interests, but
when it becomes time to buy out these minority interest they expect the value
to be discounted (these discount can be as much as 40%). They are happy to take
the investment money and at times not even pay any yearly dividends but
reluctant to pay back the full value of the minority shares. I can see that if
a minority shareholder tries to sell his shares on the open market these
discounts may apply, but it also seems to me to be unreasonable for a stock buy
back to go this route. If you or any of your clients are considering a minority
investment in a business make sure the sale contract contains language that
prevents the business from discounting minority share values upon buy back. If
you are going through a buy back, get an appraisal on the business. Business
owners tend to offer lower values on stock buy backs than the stocks are
actually worth. My experience is that businesses buying back their minority
shares tend to offer 50% or less for these shares before consideration of any
minority discount.