Valuation of minority interests in nonprofit companies

Abstract

AIM OF THE PAPER

When valuing a company, investors usually concentrate on the entire entity. However, in many situations the valuation does not focus on the 100% share but on a fractional interest. If the fractional interest to be valued is a minority interest then its value will be lower than the proportionate amount of the company's equity. One reason for this is that the minority owner cannot make much influence on the decisions in the company. Furthermore, due to this and to other factors, minority shares are obviously less marketable than majority shares. The appraiser faces even more problems when valuing minority shares of nonprofit companies, as in their case the mostly accepted and preferred valuation method (discounted cash flow approach) cannot be applied. This paper summarizes the significance and the application of different discounts used in valuation to handle the above stated problems, with a special attention to the case of nonprofit companies.

METHODOLOGY

Following a thorough literature survey, authors present a case study, which is based on the case of a real Hungarian company. However, having no authorization from owners to publish information about the finn, authors changed the company name and the numbers. The case study is aimed to give a help in understanding the quantitative effect of different discounts on company value.

MOST IMPORTANT RESULTS

First, the case study confinns that in case of nonprofit companies asset-based valuation techniques get priority against cash-flow discounting methods. Furthennore, calculation results show that the value of a minority share is significantly less than the proportionate part of the firm's shareholders' equity.

RECOMMENDATIONS

Although parts of this study (valuation methods, selecting the appropriate method, discounts) are already known in the literature, authors believe that the illustration and explanation of the valuation process through the case study creates value added.