Valuing minority interests: why a part-share is worth less than its share of the whole.

It comes as a surprise to many people, but a minority stake in a business is almost never worth its simple proportion of the whole. If a company is worth R10 million and you own 20% of it, your shares are usually worth less than R2 million — sometimes considerably less. The arithmetic feels wrong. The reasoning, once you see it, is not.

Two separate forces pull a minority interest below its pro-rata value, and understanding them is essential in any buy-out, divorce, estate or shareholder dispute where a partial holding has to be valued. They are often confused, and they are not the same thing.

The first force: you cannot control the business

A minority shareholder does not control the company. They cannot decide whether dividends are paid or profits are reinvested, cannot set salaries or appoint management, cannot force a sale, change strategy, or block a decision they disagree with. They are, in practice, along for the ride that the controlling shareholders choose.

That lack of control has real value consequences, and it is captured in what is called the discount for lack of control — the minority discount. A buyer of a minority parcel knows they are buying influence without command, income they cannot guarantee, and an exit they cannot dictate. They pay less per share than they would for a controlling block, because they are getting less power over their own investment. The size of this discount is not plucked from the air; it is assessed against evidence and the specifics of the holding, not asserted.

The second force: you cannot easily sell

The second force is entirely different, and this is where the confusion usually lies. Even setting control aside, shares in a private company are hard to sell. There is no ready market, no exchange, no queue of buyers. Selling a minority parcel of an unlisted business can take months, often requires the consent or cooperation of the other shareholders, and may be subject to pre-emption rights in the shareholders’ agreement.

This illiquidity is captured separately, in the discount for lack of marketability. It reflects a simple reality: an asset you cannot readily turn into cash is worth less than one you can. A listed share can be sold in seconds; a 20% stake in a private SME cannot. The harder and slower the exit, the larger the discount.

Why the distinction matters

These two discounts are conceptually distinct — one is about power (control), the other about liquidity (marketability) — and both can apply to the same holding. A minority interest in a private company can suffer from both at once: no control and no ready market.

But because they are separate, they have to be handled carefully. A defensible valuation reasons through each on its own evidence, applies them in a logical order — typically moving from a pro-rata value, to a minority basis for lack of control, then for lack of marketability — and is alert to the risk of double-counting, where the same disadvantage is charged twice under two labels. Each discount has to be supported and benchmarked, not assumed. A number that simply asserts “a 40% discount” without showing why is exactly what an opposing expert will dismantle.

The crucial point: discounts do not always apply

Here is the part that catches people out, and it is where the basis of value becomes decisive. Whether a minority discount applies at all depends on why the interest is being valued.

In an open-market sale of a minority parcel — a willing buyer purchasing a part-share — the discounts clearly apply, because that buyer really will face the lack of control and the lack of marketability. But in certain dispute and statutory contexts, the position can be the opposite. Where a shareholder is being bought out under the Companies Act, or in an oppression matter, the appropriate basis is often fair value, and in that setting it may be inappropriate to penalise the departing shareholder with a minority discount at all — the law may require valuing their proportionate share of the business without that reduction. The legal trigger for which basis applies belongs to the attorneys; recognising it, and valuing accordingly, is the valuer’s responsibility.

So the same 20% holding can be worth markedly different amounts depending on whether it is being sold on the open market or bought out in a dispute. That is not inconsistency — it is the basis of value doing its job, and it is why establishing the purpose at the outset matters so much.

Where this bites

The minority-discount question is rarely academic. It surfaces — and is heavily contested — wherever a partial interest changes hands or must be quantified: a partner buy-out, a shareholder dispute, a divorce in which one spouse owns part of a business, an estate holding a minority stake. In each, the discount question can move the number by a large margin, and each side will argue it hard in the direction that suits them.

That is precisely why this is work for an independent valuer who applies the discounts — or declines to — on the evidence and the correct basis of value, and who can explain and defend every step. A minority valuation that cannot withstand that scrutiny is worse than none.

If you are dealing with a part-share — buying one, selling one, or disputing one — the place to start is an independent, properly reasoned value on the right basis. Send me the details of your situation; the first conversation is free, and there is no obligation either way.