When control owners of businesses decide to sell or gift partial interests, people (including us appraisers
can get confused about what is supposed to be valued and on what basis.
Let’s take a simple example. Mr. Jones owns 100% of the stock (all of one class) and wants to gift 49% of it to his daughter. After the gift, he will retain control (51%) and his daughter will own a minority (49%) interest. The subject interest – what is being transferred – is the 49% interest, and it should be valued as such, definitely with a discount for lack of control and possibly with a discount for lack of marketability (if applicable). Mr. Jones will keep a 51% and controlling interest, and it should be valued as such, if need be (i.e. if he dies with 51%).
The key point is that Mr. Jones will retain control. No matter what else goes on – maybe the stock is recapitalized into voting and non-voting, or there are gifts to more than one person (still adding up to 49%) – control is maintained so the subject interest is valued on a minority basis.
What if Mr. Jones wants to gift 51% to his daughter and keep 49%? Now control is being transferred and preserved, in the form of the 51% interest, so it has to be valued as a controlling interest. Mr. Jones will end up with a 49% minority interest, valued as above.
What if he decides to gift 33 1/3% each to two daughters? Now control is being destroyed and not transferred. In the end there will be three equal 33 1/3% owners, the interests being transferred are each minority interests, and nobody will have control. All of the interests are minority, although some would argue that the lack of control discount is mitigated somewhat by “swing value” because any two shareholders acting together would have control.
I have found, and I make it a point in my appraisal reports, to address the issue of who currently and prospectively will own what, what is being transferred, and whether control is preserved, destroyed, or transferred at the very beginning of my appraisal report. In those instances where control is retained (as in the first example above), the value of the retained interest does NOT need to be addressed in the appraisal report, and may lead to confusion.