What is a minority discount?
A minority discount is a concept used in the valuation of a company that reflects the fact that minority shares in society are less value because their holders do not have a control interest in the company. Minority discounts appear especially in the valuation of closed companies with a small number of owners. In these situations, people with minority shares cannot control the company and lack the ability to shape the company or move it in new directions. With this information in the hand, the evaluator can determine the value of individual shares in the company. If partners divide the company 60-20-20, the proportional value can be expected; In other words, a person holding 20% of the company would have a stock worth 20 percent of the company's value. However, this is not because this person has a minority interest.
In the above example, the appraiser could decide to take a five percentage deduction to reflect a minority discount. Someone who controls 20 percent of society would actually hold only 19the percentage of the company's value. The amount of a minority discount is not set. It depends on a number of factors and is adapted for the situation rather than the application as a universal standard.
For people holding minority shares in society, a minority discount means they cannot get as many for their shares as they had if they were to hold a control interest. This may become a critical point in negotiations on the sale or reorganization of the company, because minority shareholders who are afraid of losses due to a minority discount may be more resistant if they cannot negotiate a reasonable agreement.
The related concept is a control bonus, the amount above the market value, which would be willing to pay for the purchase of a control. In the above example, if one of 20 % of partners bought 20 percent of 60 % of the partner's share, could be willing to pay a control bonus for obtaining 20 % of the other minority shareCH shareholders. The control bonuses reflect the substantial advantage that someone holds when a control share in society is obtained. Investors who are witness about trades can hardly negotiate with someone who is interested in obtaining a control stake in the company and has considerable resources to support the experiment.