When it comes to buying out minority shareholders, the biggest hurdle is determining the fair value of minority ownership. It’s rarely as simple as purchasing the minority owner’s shares outright. Should a minority owner discount apply? Do minority owners have any rights? What is “fair value”? The answer to all of these questions is, it depends.
Determining “Fair Value” of Minority Ownership Shares
In the calculation of fair value, a plus b doesn’t always equal c. Florida law mandates that minority owners of closely held companies have the right to the fair value of their shares under certain circumstances (i.e. dissolution or illegal activity on the majority owner’s part). However, the law’s definition of fair value combined with its parameters for minority owner discounts make figuring out a fair purchase price confusing at best.
The conflict over fair value stems from two opposing views: those for minority owner discounts and those against them. Those who agree with minority owner discounts, which can reduce the purchase price of minority-owned shares by up to 50 percent, argue that lack of both voting power and marketability should factor into the cost of a buyout. The opposition argues for fair market value to be paid based on a business valuation.
Minority Owner Discounts
Whether or not a minority owner discount is applicable depends on a company’s individual situation, but just because it applies doesn’t always mean it is the best course of action.
For example, when a minority shareholder is being squeezed out rather than electing to sell, the argument for minority owner discounts is weakened. In this type of minority owner buyout, the majority owner is increasing their interest/gaining ownership in a situation where they already have control. So, lack of voting power on the minority ownership side doesn’t factor into the value of the shares. If a third party were to be purchasing a minority owner’s shares, however, lack of power might be grounds for a minority owner discount.
Furthermore, whether the sale of minority shares is voluntary or involuntary comes into play when deciding what factors should or should not be weighed in the determination of fair market value. Some argue that an involuntary minority owner buyout should be treated as compensation rather than as a transaction.
How to Determine Minority Ownership Value & Discounts
Your best course of action in a minority owner buyout is to get expert advice and to enlist legal and financial professionals to work out the details. Besides the consideration of Florida law and your company’s unique situation, it is always in your best interest to keep transactions amicable. Links Financial’s 30+ years of experience makes us experts in relationships as much as we are experts in partnership buyouts. Contact our firm today to learn more.