Valuing minority shareholdings – the basics explained

Does a minority shareholder have a proportionate share in a company’s value? Rarely!

The key issue with any minority shareholding valuation is the extent to which its owner is able to influence the returns he or she receives. Generally, the smaller the holding, the less the influence and the lower its value, unless that is it has strategic importance. A small minority holding cannot influence dividend distribution policy and the owner may face difficulty in finding a buyer for his shares even if the Articles of Association allow it, which often they do not. Acquiring the shares may enable a fellow shareholder to gain a position of influence in a company in which case it will have some strategic value but such situations are uncommon.

The valuation of a minority shareholding is usually approached in one of two ways, both involving an assessment of the potential investment returns which the minority shareholder can expect to receive, either through the payment of dividends or realisation of capital. In either case, it is necessary to determine the maintainable profits of the company and its ability either to sustain dividend payments or to retain and build capital value.

To determine value from dividend income, there must be realistic expectations of future dividend payments and ideally a regular pattern of dividends paid by the Company in the past. An appropriate dividend yield would then be used to calculate shareholding value.

To determine the value of the minority in the event of a postulated sale of the Company, it is necessary to value the whole company first on the basis of an arms’ length sale between a willing buyer and a willing seller – the open market value. Where the minority valuation is derived from a whole company valuation, a discount is normally applied to the whole company value to take account of the degree of lack of control inherent in the minority holding.

The only situations in which the minority shareholder is guaranteed his or her proportionate share of a company’s value is when it is sold or when the Articles of Association or a Shareholders’ Agreement so provide.

So, as in most walks of life, there are few benefits to being in a minority.