M&A Deal Points | Minority Discounts in Ownership Agreements

Valuing Equity in Buy–Sell Agreements: Should Discounts Apply?

When drafting buy–sell provisions in shareholder or operating agreements, one question frequently arises: should valuation discounts apply when an owner exits the business?

The answer can significantly affect the value of a departing owner’s equity.

Two common valuation adjustments often come into play:

Minority Discounts

These reflect the reduced control associated with owning a minority interest. Because minority owners typically cannot influence key decisions, their shares may be valued lower than a controlling stake.

Marketability Discounts

These account for the difficulty of selling an interest in a privately held company. Unlike public shares, private business interests often lack a ready market, which can reduce their perceived value.

Not surprisingly, these discounts can create tension between owners. Majority holders often favor discounts because they reduce the cost of buying out a departing partner. Minority owners typically resist them, arguing that discounts can undervalue their equity.

Whether these adjustments make sense often depends on the structure of the business.

In companies with a clear controlling shareholder, such as private equity–backed businesses, valuation discounts may more accurately reflect the economic reality of a minority stake. In more evenly held companies, however, applying discounts can feel inconsistent with how the owners view their relative positions.

There is also the risk of overlapping valuation adjustments. Discounts for lack of control can sometimes overlap with control premiums used in appraisals, which may distort the final valuation if both are applied without careful consideration.

Finally, agreements that rely on formula-based valuations should address discounts explicitly. If not carefully drafted, the presence of discounts can lead parties to rely on simplified formulas rather than more thorough appraisal methods.

Ultimately, buy–sell provisions are designed to reduce uncertainty when an ownership transition occurs. Addressing valuation discounts clearly in the agreement can help prevent disputes and ensure that the process for valuing an owner’s interest is fair, predictable, and aligned with the owners’ expectations.