Losing Control

As part of tax planning, a major concern for countless clients and attorneys is  what are these or their clients' securities of privately held companies/businesses worth, especially when they have no control over them? The case is often made that in hypothetical markets with willing buyers and willing sellers, investors would be willing to pay more for interests in businesses that have the ability to manage or operate compared to interests lacking such control.  

This is simply because ownership rights to control are critical for the very reasons that they can affect outcomes of any or all of the following activities, including but not limited to: asset management, making business decisions, asset allocation choices, setting compensation for officers and employees, admitting members, acquiring assets, selling the company, and making distributions, which affects these companies’ cashflows, or ultimately their worth.  As such noncontrolling interests are worth significantly less than their prorate share of the entire companies’ values.  This price differential is commonly referred to as the discount for lack of control.

Similar to the discount for lack of marketability, there is market-based evidence/studies for the discounts for lack of control, which are often used by professional appraisers to arrive at proxies for determining the appropriate discount to arrive at the fair market value of such interests.

Notwithstanding these studies, an appraiser must also look to the history of prior management actions, its governing documents’ provisions restricting control and other conditions to properly assess the appropriate discounts applicable to their subject interests at hand.

At Core Valuation, we will consider all the relevant facts through detailed discussions with counsel and our clients that would help them develop strategies to enable them to grow and protect these investments. 

If you have questions about your unique situation, or would like more information, please contact us.