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Discount for Lack of Control – Subject Interest
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| 5.5.2 Discount for Lack of Control – Subject Interest The interests being appraised in this report is a 5.45% minority (non‐controlling) interest in the issued and outstanding common stock of Peachtree Plumbing, Inc. The controlling interest will not require a discount for lack of control. However, careful consideration must be given to the methodologies used to determine the operating value of the 5.45% interest in order to determine the applicability of a DLOC. Indicated operating value estimates made based on the Direct Market Data Method, the Single Period Capitalization Method, the Adjusted Book Value Method (including excess earnings attributable to unrecorded intangibles, and liquidation value considerations are all on a control basis. The IBA database consists of transactions that are characteristically completed between the principals and the normalization adjustments (reference Section 4.7.1 Financial Statement Normalization) effectively restated the Company’s financial position to reflect what an owner with all the benefits of control would expect. The normalization process of making control‐related adjustments (in effect, giving the full benefit of control to the prospective purchaser) also mitigates the perspective that the Income Approach generally produces anon control or control neutral interest value estimate. In summary, adjustments that only a controlling interest has the authority and ability to make have been considered (see Section 4.7.1 Financial Statement Normalization. The result of making these control adjustments provides the basis of an economic income flow that represents what a controlling interest in the Company, would have access to based on their 100% ownership interest. Page 115 of 141 Therefore, considering the discussion above, the key items discussed in Section 2.6.2 Discount for Lack of Control (“DLOC”), and the fact that the interest being valued is a 5.45% interest (in other words anon controlling interest) in the issued and outstanding common stock of the Company there is a need fora DLOC across all valuation methods. There is no direct method for determining such discounts for small, privately‐ owned companies. Generally speaking, DLOCs are developed using publicly available data regarding calculated control premiums. Control premiums have been defined by the Mergerstat Review as, the additional consideration that an investor would pay over marketable minority equity value (i.e., current, publicly traded stock prices) in order to own a controlling interest in the common stock of a company.” 21 The premiums calculated are based on actual public company acquisitions of controlling equity interests in other public companies and are measured as the additional cost of the controlling block of stock purchased over the market price of the seller’s stock five days prior to the announcement date of such a transaction. The actual premiums paid fora controlling interest in a particular company often includes other considerations such as market or product synergies, operational consolidation benefits, talent acquisition, and defensive positioning versus a particular competitor, among others. These factors cannot generally be identified and valued easily (if at all) and therefore cannot be separated from the total premium to determine the pure control portion of the premium. However, the data has been generally accepted as a reasonable place to start. Once the premium over the market has been determined, an implied minority (non‐controlling) interest discount can be calculated as follows Download 0.84 Mb. Share with your friends:
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