Certain discounts may be applied in determining the value of business interests of closely held companies. Typically, appraisals of fair market value don’t automatically incorporate these discounts. Thus, the discounts must be applied after the initial fair market value is determined (but check with the appraiser first to see if she or he already applied a discount).
The two primary discounts are 1) lack of marketability discount and 2) lack of control discount.
By the very nature of a closely held business, investments in privately held businesses are illiquid because there is no ready market for the purchase and sale of those interests as there is with the shares of companies publicly traded on the stock exchanges. Consequently, because it is usually more difficult to find a buyer for the business interests in closely held companies, a valuation discount is applied.
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The lack of control discount is for owners who have only a minority interest in the business and, therefore, limited say-so on what happens with the business.
The amount of discount taken for these two discount types varies, but they typically reduce the valuation by thirty percent (30%) or more on a combined basis.
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Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305 952-649-9771 www.bwittenburglaw.com bonnie@bwittenburglaw.com
