Definition - What does Minority Interest mean?
A minority interest in a company is an equity position that does have sufficient votes to control the operations and finances of the the company’s business. A minority interest is usually less than 50% of the outstanding voting shares of a company. In some circumstances, though, shareholders holding less than 50% of the votes are still able to control the business through diffusion of ownership or control by agreement.
Divestopedia explains Minority Interest
It is a common valuation practice to apply a minority discount to reflect the disadvantages of owning a minority interest in a company. This is because the minority interest has an absence of control over the company.
A proxy for a quantification of the minority discount is made by assessing control premiums paid in the market place. A control premium is defined as the additional consideration that a buyer would pay over a marketable minority equity value (i.e. publicly traded stock price) in order to own a controlling interest in the equity of the company. Typical minority discounts range from 25% to 50%.
Minority shareholders in a business should clearly define in a unanimous shareholder agreement (USA) the valuation methodology, including the application of a minority discount on the buyout of their equity.
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