What sort of discounts to value exist, and when are they applied?

In determining the Fair Market Value of an interest in a company or business, a business valuator will apply certain discounts as required by the particular situation.   A brief explanation of a few of the most commonly applied discounts are as follows:

• Minority-interest discount - when the interest being valued is less than 50% of the total shares or partnership interest, a discount is typically applied to account for the owner's lack of ability to control the direction of the business and plan the ultimate divestiture approach.  Note that in minority-oppression situations, case law indicates that such a discount is not appropriate. 

• Marketability discount - when a business interest cannot be sold to another party, a marketability discount is appropriate.  In such a case, it is not reasonable to assume that because there is no market for the interest, it is therefore worth nothing.  Instead, a valuator will value the interest as if there were an available market, and then apply a discount to account for the lack of marketability.

• Blockage discount - this typically pertains to large blocks of publicly-traded securities.  A seller of a large block of shares (much higher than what is typically traded in an average week, month, etc.) will either have to spread the disposition of the securities over a period of time or incur a large discount from the current trading price in order to immediately liquidate the block of shares.  Accordingly, a blockage discount from the current market price is appropriate.

In all of these cases, whether or not a discount applies and the amount of the discount will be determined by the valuator based on the case facts.  Should you have any questions regarding these, or any other discounts, please contact us. 

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