The Art of Business Valuation

CHAPTER 9Valuing Partial Interests in a Business

Up to this point the focus has been on 100% control ownership of the business, i.e., estimating the value of the entity, the enterprise value, and once debt is removed, the 100% equity value. Yet business valuations are often for partial interests in the business. Adding partners, removing partners, divorce when an owner has partners, gifting interests, estates, and more are all situations where partial interests are valued. When valuing a partial interest, the interest must be investigated and understood above and beyond the business itself. In many ways this is equivalent to performing a second valuation.

When a business has multiple owners, the different owners often have very different rights and responsibilities and in that case each owns a different interest. At the highest level, rights may be broadly broken up along the lines of:

• cash flow
• control
• tax benefits.

In addition to owners, lenders through loan covenants, including security agreements on assets or stock, can exert control over a company. Lenders or others may have option agreements entitling them to buy stock or equity in the future. These other interests may also be valued by the analyst, such as options and debt.¹ Finally, the interplay between the rights of an interested party can affect the rights and value of the others.

The rights and risks of any interest are determined by statutes, court cases, and agreements between the parties. The relationship between ...