Brief Definition
A minority discount is a reduction in the value of a minority ownership interest in a business or asset, relative to the value of a controlling interest. This is because the owner of a minority interest has less control over the business or asset, which can limit their ability to influence decisions. The amount of the minority discount can vary depending on factors such as the level of control held by the majority owner, the size and complexity of the business or asset, and the legal and regulatory environment. Minority discounts are often considered in business valuation to determine the fair market value of a minority ownership interest.
Further Explanation
A minority discount is a reduction in the value of a minority ownership interest in a business or asset, relative to the pro-rata value of a controlling interest.
When valuing a minority interest, it is assumed that the owner of the minority interest has less control over the business or asset than the owner of a controlling interest. This lack of control can reduce the value of the minority interest, as it may limit the owner’s ability to influence the decisions made by the business or asset.
Minority discounts are typically applied in situations where the owner of a minority interest does not have the power to control the business or asset, such as in the case of a non-controlling shareholding in a publicly traded company or a minority ownership interest in a privately held business.
The amount of the minority discount can vary depending on a number of factors, including the level of control held by the majority owner, the size and complexity of the business or asset, and the legal and regulatory environment. In business valuation, the minority discount is often considered in conjunction with other factors, such as the company’s financial performance, the industry in which it operates, and the economic conditions in the market, to determine the fair market value of a minority ownership interest.