Minority shareholding valuation: why 10% rarely means 10%

If a private company is worth £2 million, a 10% shareholding must be worth £200,000. Simple.

Unfortunately, a minority shareholding valuation rarely works that neatly.

The £200,000 figure may be a reasonable starting point. But it assumes that owning 10% of the shares gives you 10% of everything that makes the business valuable – its profits, assets, influence and eventual sale proceeds.

In practice, a minority shareholder may have little control over a company, limited influence over dividends and no obvious buyer for their shares. That can reduce what somebody is willing to pay.

On the other hand, a minority holding can sometimes carry valuable rights or have strategic importance to a particular buyer. That can push its value in the other direction.

The percentage tells you how many shares somebody owns. However, it doesn’t settle what those shares are worth.

Minority status is about control, not just percentage

A minority shareholding generally does not give its owner control of the company.

Holding more than 50% of the voting rights will normally allow a shareholder to pass an ordinary resolution. Some decisions require a special resolution and a 75% majority. Sections 282 and 283 of the Companies Act 2006 set out these thresholds.

But the percentage alone doesn’t tell the whole story.

A company may have different classes of shares carrying different voting, dividend or capital rights. Its articles or shareholders’ agreement may also give particular shareholders the right to appoint a director, veto specified decisions or approve a sale.

Let’s compare two people who each own 30% of a company.

One owns 30% while a single shareholder controls the remaining 70%. The other owns 30% in a company whose remaining shares are divided between several smaller investors.

The percentage is identical, but the first shareholder is likely to have a lot less influence.

When might a minority shareholding valuation discount apply?

A common approach is to calculate the value of the business as a whole, work out the minority shareholder’s proportion and then consider whether an adjustment is needed.

A discount may be appropriate because the shares come with disadvantages that a controlling shareholder would not face.

These can include:

• Limited voting influence
• No power to appoint or remove directors
• Little control over the payment of dividends
• Restrictions on transferring the shares
• A requirement to offer the shares to existing shareholders first
• No ready market in which to sell them
• Limited influence over the timing or terms of a company sale

Suppose our £2 million company has a 10% shareholder. The initial pro-rata figure is £200,000.

A potential buyer might ask what that £200,000 actually buys. If they cannot influence the business, cannot predict when dividends will be paid and may struggle to sell the shares later, they may offer considerably less.

In its Capital Gains Manual, HMRC tells caseworkers that the size of an unquoted shareholding can be critical to its per-share value. It illustrates this with a hypothetical example: shares valued at £100 each within a 75% holding might be worth only £20 each within a 10% holding. This is not a standard discount scale. It shows why each holding must be valued on its own facts.

Why a standard discount table can mislead you

You may come across tables suggesting a particular discount for every band of shareholding.

They make a difficult subject look reassuringly precise. However, they can’t tell you what a particular holding is worth.

Two 10% holdings can have very different values because of:

• Rights attached to the shares
• The distribution of the remaining shareholdings
• The company’s history of paying dividends
• Its financial performance and prospects
• Restrictions contained in its articles
• Provisions in a shareholders’ agreement
• The existence of a willing or strategic buyer

Strategic value can be especially important.

Imagine that somebody already owns 41% of a company and has the opportunity to buy another 10%. That purchase could give them majority control. The shares may therefore be worth more to that buyer than to an unrelated investor.

In short, the same shares can have a different commercial significance in different hands.

The purpose of the valuation changes the answer

Before choosing a valuation method, you need to know why the shares are being valued.

A valuation might be required for:

• A voluntary sale between shareholders
• The departure, retirement or death of a shareholder
• A management buyout
• A company purchase of its own shares
• An employee share scheme
• Capital Gains Tax or Inheritance Tax purposes
• Probate or divorce proceedings
• A shareholder dispute
• A compulsory transfer under the company’s governing documents

These situations don’t necessarily use the same definition of value.

A negotiated sale depends on the price a buyer will pay and a seller will accept. A tax valuation may have to follow a statutory definition of market value. A compulsory transfer may use a formula in the company’s articles or shareholders’ agreement. Valuations for probate, divorce or a shareholder dispute may require a different basis again.

The purpose changes the method and may change the answer. A valuation prepared for one situation should not automatically be reused for another.

Read the documents before reaching for the calculator

A company’s articles of association and any shareholders’ agreement should be reviewed at the start of the valuation.

They may contain:

• Transfer restrictions
• Pre-emption rights
• Good-leaver and bad-leaver provisions
• A prescribed valuation formula
• Instructions on whether a minority discount should apply
• Special voting or dividend rights
• Provisions dealing with death, retirement or disputes

Companies House describes the articles as a company’s internal rulebook, covering how decisions are made and matters connected with its shares. Those rules can materially affect what a buyer is acquiring. A company can use the standard model articles or adopt bespoke provisions.

That is why you should read the documents before the numbers are finalised. A beautifully calculated valuation based on the wrong rights is still the wrong valuation.

How to get a defensible minority shareholding valuation

A professional valuation should normally consider three connected questions:

1. What is the company worth as a whole?
2. What economic and legal rights come with the particular shares?
3. What valuation basis is appropriate for the purpose?

Answering them may require assessing earnings, cash flow, assets, financial forecasts, commercial risk and comparable transactions. The valuer will then consider the size and rights of the holding, its marketability and the company’s ownership structure.

Where legal proceedings, disputed rights or compulsory transfers are involved, your accountant may also need to work alongside the company’s solicitor.

THP’s helps business owners and shareholders obtain realistic, supportable valuations for sales, ownership changes, management buyouts, tax matters and other important decisions. If you need to value a minority shareholding, speak to our Business Valuation team before relying on a percentage or an online table.

The right question is not simply how many shares are being valued. It is what those particular shares allow their owner to do.

This article provides general information only. The appropriate legal, tax and valuation treatment depends on the circumstances of each case.