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The Divorce Encyclopedia
Minority Discount

Term Definition Minority Discount - applied sometimes to valuing a private business and reflecting the lack of control of a minority shareholder or owner.
Application in Divorce As it applies to divorce, the calculation of a minority discount may affect the market and fair market value of the enterprise. A minority discount is a percent reduction in the value of interest that is only a percentage of the corporation stock. Generally, a minority discount is distinguished from a marketability discount, which is a similar reduction based on the fact that a corporation’s stock is difficult to sell.

The fundamental argument for using a minority discount is that lack of control reduces the real economic value of the minority interest, that is, the fair market value. Some courts believe this actual disadvantage is small, particularly when the business is owned and operated by one spouse’s family.

Minority discount, which reflects an interest that is less than controlling, means that the party holding it is unable to control the management and its directors, if any. Minority ownership often happens in private or closely held corporations, and these entities must be appraised by various experts who use different methods to place a value on the business for purposes of marital distribution.

In calculating a minority discount, the extent to the minority interest disadvantage must be considered in determining the discount. The size of the minority interest is not so important as hostility or friendliness of the majority interest.

In making determining a minority discount, a valuator must look at provisions that protect minority stockholders, such as buy and sell agreements that establish the terms and condition for the withdrawal of parties in the business.

Businesses valued at the beginning and the end of a marriage must use the same rules for calculating a minority discount. This ensures an apples-and-apples comparison when measuring the growth of the company.

In calculating minority discount, some courts use as a standard transferable value, which is "the price in a hypothetical sale to a reasonable buyer," and others use the standard of intrinsic value, which is "the value of asset in the hands of the present owner, without a sale..." In general, when the sale on the open market is likely as a result of a divorce, or when a minority interest is likely to be adversely treated by a hostile majority, courts require the calculation of a minority discount. On the other hand, when the sale is not imminent, or when the "actual future oppression is hypothetical or speculative," courts are more hesitant about applying a minority discount.

In a closely held corporation, a minority discount as well as the marketability discount, are two factors that make the appraisal value of the property the domain of experts. The problem of appraisal is made more complicated because one spouse (usually the husband) may be far more emotionally attached to the business than the other, and he may be far more threatened by the cost of holding on. In some cases, part of the value of the business may be separate property and the remainder marital property, as in the case where one spouse had an established business when he or she married. In other cases, the minority discount may attach to interest of a spouse who is not an active participant in the business, as in the case where a husband gives a wife a part of a business he established before marriage.

"Placing a fair market value on the [close] corporation is an art, not a science," said one Illinois court of appeals decision.

See also Buy and Sell Agreement; Closely Held Corporation; Marketability Discount; Fair Value; Fair Market Value.

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