9
O P I N I O N
Discounts and stock values
There are multiple considerations to be made when valuing a privately-held company and the assessment of the many moving parts.
T he valuation of privately-held firms, including those in the AEC industry, will usually involve discounting to arrive at a concluded value of the subject interest. For those of you who have been through the valuation process in the past, you are at least familiar with the terminology; for those of you who have not, I thought a primer might be in order.
Tracey Eaves GUEST SPEAKER
❚ ❚ Asset approach. Under an asset approach, no indi- vidual shareholder owns the corporation’s assets at the individual level; shareholders with a majority po- sition and voting control have the ability to control the corporation and the accumulation or disposition of the assets. Therefore, the control shareholders have access to the equity in the assets and asset- based methodologies produce values at the control level. ❚ ❚ Income approach. Depending upon the appraiser’s decision as to the level of normalizing adjustments to the financial statements, income approach meth- odologies can produce a value indication at the con- trol or minority interest level. If “control” normal- izing adjustments are made, the value indication is at the control level. The opposite is true if the only normalizing adjustments made are those applicable to what a minority interest holder could affect.
To place a value conclusion on a privately-held business interest, we must determine the level at which the valuation will be done – a control interest basis or a minority interest basis. An owner of a 51 percent or more interest is considered a “control” owner and a holder of 49 percent or less is considered a “minority” owner. In the context of fair market value, the levels of these two types of owners are significantly different. It would be easy to assume that the value of a minority interest in a privately-held firm is equivalent to the pro-rata value of a 100 percent interest, but that is not the case. Issues of control and marketability at the minority interest level must be taken into account. The various approaches and methodologies used in valuation will drive whether or not discounts are applicable to the subject interest in an appraisal.
See TRACEY EAVES, page 10
THE ZWEIG LETTER December 31, 2018, ISSUE 1277
Made with FlippingBook Annual report