Schedule a Consultation: 858.483.9200
Valuing Ownership Interests in a San Diego Business: What is a Control Premium?
Valuation of a person’s ownership interest in a San Diego business is important in several contexts including:
- Personal net worth statements
- Lending and other financial transactions
- Personal divorce proceedings
- Probate proceedings
- Individual and business bankruptcies
- Voluntary or forced buy-outs
- Buying or selling one’s ownership interest
- And more
In general, the value of shareholdings in a company or ownership units is established by a professional appraiser in the manner that one might hire an appraiser to set the value of a house being bought or sold. Of course, the most important aspect of appraising an ownership interest is the value of the business itself. The business value is usually some function of revenue, profits, assets, liabilities, and growth trends. But, note that the value of the business is a separate issue from the value of the shareholdings. It is rarely the case that the value of the ownership is a simple mathematical division of the business value divided by the number of ownership units.
There is a significant extra value to ownership if a person has controlling ownership. The extra value is what is known as a “control premium.” Depending on the circumstances, the control premium can range from 10% to 50% on top of the value set based on economic and asset factors. See, for example, Belmont Station, Inc. v. DOGZ, LLC, Case No. B259171 (Cal. App. 2nd Appellate 2015) (discussing expert valuations with 10% to 20% control premiums); Cravens v. Welch, 10 F.Supp. 94 (US Fed. SD Cal. 1935) (minority stock interests in a small closely-held company ” … are usually worth much less than the proportionate share of the assets…”). For publicly-traded corporations, real-world examples show that the control premium has been in the 30-50% range and can be upwards of 100%.
The general reason for adding a control premium is that control gives the owner the power of direction and that power is valuable. With corporations, for example, the shareholders elect a board of directors who run the company. The directors, in turn, hire the Chief Executive Officer (“CEO”) and other senior management. If you have a controlling ownership interest, you can elect the majority of the directors (including yourself) and then the directors can hire the controlling shareholder as the CEO. Among other things, this the gives the controlling shareholder the power to:
- Direct the nature of the company’s business
- Enter into contracts
- Buy real estate, other companies, various assets, etc.
- Dissolve, expand, or merge the company
- Borrow and obtain financing
- Set pay rates and benefits for senior management
- Set and declare company policies including those related to reimbursements and use of company assets
- Declare dividends
- Issue and/or repurchase shares/ownership units
- And more
As can be seen, valuation can be complex. If you find yourself needing an ownership valuation, an experienced San Diego corporate attorney can help.
Contact San Diego Corporate Law
For more information, contact attorney Michael Leonard of San Diego Corporate Law. Mr. Leonard provides a full array of legal services for San Diego businesses including contract review and drafting, mergers and acquisitions, corporate formations, private placement memorandums, and employment-related services like crafting employee handbooks. Mr. Leonard can be reached at (858) 483-9200 or via email.
You Might Also Like:
Selling or Buying a Business? Valuation Methods
Checklist When Buying Or Selling A Business
Buy-Back Agreements: Removing a San Diego Shareholder for Cause or No-Cause
Buy-Sell Agreements for California Professional Corporations
