Dada Adefolami

Ownership
Discount factors need to be considered when the interest is less than 100%.  When valuing an interest in a private company that is less than a 100% interest, it may be appropriate for that interest to be discounted from the full pro rata value.

The level of the discount will depend on various factors, including the size of the interest, the spread of other interests, the degree to which the shareholding is locked in and the pattern of dividend payments, both historic and going forward. The following ranges of discounts are often reasonable:
1. Over 50% interests:          a discount of 5% to 10%.
2. 50% interest:                 a discount of 15% to 25%.
3. 26% to 49% interest:      a discount of 30% to 40%.
4. 10% to 25% interest:      a discount of 45% to 55%.
5. Less than 10% interest:   a discount of 60% to 75%.

a. Discounts for size may be minimal for shareholdings in excess of 75% and be small say 10% for interests of 51% to 74%. This reflects that at 51% and above, the interest controls the company and an interest of 75% and above can pass a special resolution

b. The discounts for 50% interests will often depend on the nature of the other interests in the company. If the 50% interest is faced with a single other 50% interest, then a large discount perhaps 25% may be appropriate. Where the 50% interest is the single largest interest, and the other 50% is held by a number of small shareholdings, then the discount may be reduced to say, 15%. In a position where the 50% interest has a casting vote, then this is in effect a majority interest and should be discounted accordingly.

Sometimes an interest has strategic value for example, 10% held and only two other interests of 45% each exist in a company. Then the interest may have considerably more value than it would in normal circumstances.

Where the valuation is for the purposes of a dispute or divorce, then the discounts of the order of those shown above are likely to be too high, and even for small minority interests a discount of no more than say 33% may be appropriate.

The Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company’s value and situation. Cash flow can be used, for example, for calculating parameters: it discloses cash movements over the period. to determine a project’s rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return and net present value. to determine problems with a business’s liquidity. Being profitable does not necessarily mean being liquid.

A company can fail because of a shortage of cash even while profitable. as an alternative measure of a business’s profits when it is believed that accrual accounting concepts do not represent economic realities. For instance, a company may be notionally profitable but generating little operational cash. In such a case, the company may be deriving additional operating cash by issuing shares or raising additional debt finance.

Cash flow forecasting or cash flow management is a key aspect of financial management of a business, planning its future cash requirements to avoid a crisis of liquidity. Cash flow forecasting is important because if a business runs out of cash and is not able to obtain new finance, it will become insolvent.

In finance, the beta (â or beta coefficient) of an investment indicates whether the investment is more or less volatile than the market. In general, a beta less than 1 indicates that the investment is less volatile than the market, while a beta more than 1 indicates that the investment is more volatile than the market.

Where the company documentation or a shareholders’ agreement specifies how the shares are to be valued, then these should be followed.

For non-trading companies such as property companies, the discounts for minority interests tend to be lower than the discounts appropriate to trading companies

Business value used to determine what a business is worth to a particular investor or business owner.

Also, measure of business value that reflects an investor’s in-depth understanding of the company’s true economic potential.

You can choose the intrinsic business value standard if you seek to determine the business worth based on solid understanding of the business fundamental attributes. The knowledge allows you to develop a comprehensive estimate of business value based on what business ownership benefits can be achieved. These benefits are tied to a number of key factors such as:

1. Business earnings potential.
2. Likely business growth.
3. Company’s financial and operational strength

Choosing a different basis of value may lead you to a different valuation result. For example, an investor focused on building a diversified portfolio of companies may value a business differently than an entrepreneur interested in a specific business opportunity.

Prepared By: Dada SurajuAdefolami, Professor of Finance, School of Business Administration. UNEM University, Costa Rica, is a Finance / management Consultant and Certified Forensic Accountant. You can reach him via: [email protected]: 08052043855