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For What It’s Worth: Another Great Question – December 2014

“For What It’s Worth” is a monthly newsletter written by Director Rand Curtiss.

Once again, a perceptive valuation student’s great question inspired another monthly letter. This time the question was “Since a minority interest lacks control, wouldn’t it be harder to sell it, and wouldn’t that also lead to a discount for lack of marketability?”

The answer lies in a hidden premise: a minority interest in what?

If we are dealing with a liquid interest, such as in a public company or a private company that has an enforceable redemption mechanism (such as a funded buy-sell agreement or an ESOP), the answer is no. There is no discount for lack of marketability because the minority interest is liquid.

If we are dealing with an illiquid interest like one in a  private company with no market or a very thinly traded public company, the answer is yes, but the lack of control does not create the lack of liquidity. These are two different investment characteristics with different causes.

Two advanced points:

  1. As an addendum to the first point some argue that liquid public company stocks bear no lack of control discount, because if they did, they would be acquired.
  2. As an addendum to the second point, what I said above is true in theory. In practice, however, we do not have perfect data with which to measure either the discount for lack of control or the discount for lack of marketability. It is possible that the data we use reflect some of both.

Nevertheless, the point to remember is that discounts for lack of control and lack of marketability are driven by different factors, and are thus separate phenomena.

Valuations play a part in all tax, transaction, and litigation matters. For additional information or advice on a current one, please do not hesitate to call.

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About Western Reserve Valuation Services LLC
Western Reserve Valuation Services LLC, based in Columbus, Ohio, is a leading provider of valuation services and financial opinions relating to corporate finance transactions, corporate tax planning and compliance, succession planning and wealth preservation, employee stock ownership plans (“ESOPs”), financial reporting and portfolio / fund valuations.  For more information, visit www.wesresvaluation.com or call (614) 448-3700.

Western Reserve Valuation Services is an affiliate of Western Reserve Partners LLC, a FINRA-member investment banking firm offering financial advisory services relating to mergers and acquisitions, capital raising and financial restructuring. For more information on Western Reserve Partners, please www.wesrespartners.com or call (216) 589-0900.

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