Business Succession Concepts Help

Discounts tab

This category doesn’t apply to the business, but to an owner’s portion of the business.

If the business interest lacks marketability, in other words, it would be hard to sell the shares of the business to a typical investor at fair market value, then it is said to not have marketability– there’s no one readily available to buy the interest. Without an available market for the interest, most investors would “discount” the value of that interest by 10—20%.

When a business interest represents just a minority interest, that interest is said to lack control. When an owner has more than half of the business, for example 60% of the business, then that interest has control of all decisions. If the business interest represents less than half of the business, then that interest cannot control the decisions and is said to “lack control.” Obviously, the majority interest wins all decisions, and the minority interest is not assured of winning any decisions. This lack of control for a minority interest may be discounted 10—20% of its full value.

This discount should be applied separately. If you had 20% discount for marketability, then that would reduce the value to 80%. If you also had 10% for lack of control, you would have 90% of the 80% or 72% net. Discounts are used often with family limited partnerships and limited liability companies to value the portion representing the “limited” interest.