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Uses Of Valuation Discounts In Business Valuation

By Author: bhumi
Total Articles: 6

There are two primary instances in which Valuation Discounts are used. These include entity or shareholder level discounts. Entity-level discounts affect the business as a whole while the shareholder level discounts affect certain ownership interest holders.
DISCOUNT FOR LACK OF CONTROL

When estimating the value of an ownership interest, typically controlling ownership interests sell at a higher value than non-controlling ownership interests. There are many reasons as to why a controlling interest in a business is generally worth more on a pro-rata basis than a minority position. Generally a controlling interest can confer the rights to the following:

Elect directors
Select and/or remove management
Dictate dividend policies
Determine compensation and benefits
Acquire and sell assets
Determine corporate strategy and long-term goals
Acquire other companies or merge with other companies
Revise articles of incorporation and bylaws

DISCOUNT FOR LACK OF MARKETABILITY

Owners of closely held businesses are affected by the inability to readily convert their investment into cash. The term discount for lack of marketability is a general term referred to in Business Valuation for the impairment of value for reasons relating to liquidity. There is no quantitative formula to apply a discount for lack of Marketability to a privately held company. A valuation analyst will review several aspects of the business and organizational documents to determine if a discount for lack of marketability is appropriate.

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