632598256894

approach. Furthermore, she used price multiples of publicly traded shares when she applied the market
approach. Victoria believes that the values that result from these two approaches represent amounts as
if Acme‟s shares were liquid. Therefore, she makes a downward adjustment from the $33.5 million
value developed from her analysis.
Victoria discusses this concept with Bob. She tells him the closest empirical evidence to quantify
this sort of adjustment comes from studies of prices of restricted stocks and studies of share prices just
prior to initial public offerings. In the first type, the studies compare stock prices of public firms that
are freely traded in markets to the prices of stocks whose shares have some sort of legal restriction
preventing their sale in public stock exchanges. The second type of study compares stock prices of
firms before and after the firms went public through an initial public offering. In each type of study,
the two share prices were different. Researchers and analysts believe this evidence shows that
investors demand a lower price for shares that are relatively illiquid. From those studies, the observed
differences in prices produce a range of valuation discounts that are often attributed to illiquidity. The
price differences from these types of studies show valuation adjustments from the liquid prices of
around 35% to 45% on average. In other words, these studies suggest that illiquid stocks typically sell
for 35% to 45% less than liquid stocks.
Since this research studied shares with minority equity positions in public firms instead of
controlling positions, Victoria believes that a valuation adjustment for all of Acme‟s shares should be
smaller because she is not valuing a minority position in the firm. Based on her analysis and judgment,
she believes a 10% downward adjustment to the $33.5 million value is needed to account for Acme‟s
relative illiquidity.
Valuation Conclusion for Acme
Victoria has now completed her valuation analysis. She estimates the fair market value of Acme‟s
shares is $30.2 million ($33.5 million less 10% valuation adjustment for illiquidity).
Valuing Minority Interests
The Acme case study estimated the value of all of the shares in the firm. Had Bob owned, say, only
25% of the shares and wanted only those shares valued, Victoria would need to do some further work.
The financial characteristics of a block of shares that has legal rights to control the operations and
policies of a firm are different from the characteristics of a noncontrolling, minority block of shares.
With only a 25% interest in Acme, Bob would no longer have the legal right to control the firm. He
would have only a small voice. Furthermore, if Bob sold his shares to someone, that person would not
be able to control the firm, either (unless the person already owned shares).
People generally prefer to have control over something than not have control. Research shows that
controlling positions in firms sell for higher prices than noncontrolling positions, all other things being
equal. For instance, a 51% ownership in a firm would normally sell for much more than a 49%
interest—more than what is explained by the small difference in percentage. One can reason that a