Topic 49
Discounted Cash Flow Valuations: Minority or Control
Topic 49 explains why discounted cash flow (DCF) valuations usually result in fully distributed minority value but can result in control value.
DCF VALUATIONS
- DCF valuations of publicly traded (or privately held) businesses generally result in a fully distributed minority value (before marketability discounts) but may result in a fully distributed control value.1
- If the cash flows discounted are restated to “control” basis cash flows that capture all the economic effects of exercising control, a fully distributed control value, perhaps investment value, results from the DCF valuation. Financial statements are often re-stated during detail due diligence in a takeover or acquisition after the books have been opened up and the benefits of synergy and removal of duplicative or other costs are identified by the control (acquiring) party.
- Great care must be taken to understand the underlying nature and content of the entity estimated cash flows to determine whether a control or minority value is derived from a DCF of a public company.
DCF VALUATIONS OF PRIVATELY HELD COMPANIES IN ACQUISITIONS
- DCF valuations of privately held businesses in negotiated acquisition transactions generally result in control values as the buyer usually adjusts the expected operating free cash flows to reflect the impact of having control:
- Excess prior owner salaries and bonuses and other benefits paid by the company are removed.
- Prior owner ...
