When considering the value of a firm, it is important to include the opinions of all shareholders, not just the majority. Minority interest is a major factor in arriving at a fair valuation of a firm when assessing enterprise value. To properly account for the value ascribed to these minority owners, minority interest must be included in the calculation of enterprise value. Enterprise value (EV) is a more all-encompassing substitute for market capitalization in determining a company’s worth. In addition to a company’s market capitalization, a company’s short-term and long-term debt, and any cash or cash equivalents are included in the calculation of EV.

Comparing Balance Sheet and Income Statement Methods

Minority interest refers to the portion of a subsidiary’s equity that is not owned by the parent company. For example, if Company A acquires 80% of Company B, Company A has an 80% controlling interest while the remaining 20% is held by minority shareholders. These minority shareholders have an ownership stake and rights to a proportionate share of Company B’s net income and net assets. Under IFRS, however, it can be reported only in the equity section of the balance sheet.

Company ABC enters into an agreement to acquire Shoe House XYZ for $54.3 billion. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

Discounted cash flow (DCF) analysis is considered the most rigorous approach for valuing a subsidiary as part of a minority interest calculation. The DCF model forecasts the subsidiary’s unlevered free cash flows over a projection period, applying assumptions for revenue growth, margins, capital expenditures, depreciation, taxes, and working capital. Beyond discounted cash flow analysis, valuation multiples can provide another technique for valuing a subsidiary as part of a minority interest calculation. Multiples from comparable public companies in the same industry can be used as benchmarks. Minority interests are often valued using the asset technique, which looks at the net assets and fair market value of the firm. This method lays the groundwork for appraising the minority investment in light of the company’s assets and development prospects, providing a solid basis for making informed decisions.

This appears as a separate line item in the consolidated balance sheet’s equity section. The equity method provides a more accurate picture of the investing company’s income and financial position when it can influence the investee company’s policies and operations. It goes beyond just reporting dividends received and requires recognizing a proportional share of income/losses. The minority interest equity method refers to the accounting treatment for a company that has an ownership stake between 21-49% in another company.

Presentation of Minority Interest in Financial Statements

1. Conversely, if the market value is below book value, it could suggest overpayment for assets or asset impairment.
2. Minority interest, also known as non-controlling interest, refers to the portion of a subsidiary corporation that is not owned by the parent company.
3. Please keep reading to understand how they impact the enterprise value during a business valuation.
4. Additionally, a minority shareholder needs to proceed cautiously if the business is to be sold in the future.
5. This indicates the parent has effective control over the subsidiary’s operations and policies.

Minority interest comes into play when a shareholder has less than a 50% stake in a company. The calculation of minority interest is relatively simple and requires the use of minority shareholders’ percentage ownership of a subsidiary. This measurement is then reported on the parent’s consolidated balance sheet and income statement in accordance with IFRS or U.S.

Valuation of Non-Controlling Interest

Minority interest exists when a parent company has controlling ownership of a subsidiary, but does not have 100% ownership. It represents the claims on assets and earnings that belong to the non-controlling shareholders of the subsidiary. In summary, minority interest reflects subsidiary ownership by non-controlling shareholders.

In the world of private equity, companies and investors with a minority interest may be able to negotiate control rights. For example, venture capitalists may ask to negotiate for a seat on the board of directors in exchange for their investment in a startup. For some, the limited rights of a minority stakeholder mean the risks and limitations of minority ownership in a business outweigh the benefits.

Likewise, a proportional share of equity in the subsidiary company shows up on the parent’s balance sheet attributable to the minority interest. In the corporate world, a corporation lists minority ownership on its balance sheet. In addition to being reflected on the balance sheet, minority interest is reported on the consolidated income statement as a share of profit belonging to minority equity holders.

1. Enterprise value (EV) is a more all-encompassing substitute for market capitalization in determining a company’s worth.
2. While the majority stakeholder—in most cases, the parent company—has voting rights to set policy and procedures, the minority stakeholders generally have very little say or influence in the direction of the company.
3. Since control is obtained when the ownership percentage goes above 50%, investing 51% will guarantee control and will present less risk to capital compared to an investment of 100%.
4. This section explains the key concepts and calculations involved in determining minority interest ownership using the income statement approach.
5. Multiples from comparable public companies in the same industry can be used as benchmarks.
6. However, even an active investor with a 49% stake might need to defer to the majority owner, including when the owner makes a poor decision that puts the business at risk.

Minority shares may also be worth more if the company expands into new markets, develops new products, and forms partnerships. Unfortunately, it is quite difficult to perform due to lack of disclosures by the parent company. In addition, if a company has many subsidiaries, then it may not be worth the time and effort to try and value each one. This analysis method evaluates each subsidiary on its own and then adds up the individual interests of each subsidiary to achieve a consolidated value. This method is much more flexible, and the results may be theoretically more accurate. The constant growth method is seldom used because the assumption is that there is hardly any decline or growth in the performance of the subsidiary company.

A non-controlling interest (NCI) typically what is minority interest occurs when a company owns more than 50% of another company but less than 100%. Since the first company (parent company) effectively controls the second company (subsidiary company), the parent will fully consolidate the subsidiary’s financials with its own. A minority interest refers to the portion of a company not owned by the parent company or majority shareholder. While any ownership stake under 50% qualifies, the minority interest typically holds 20-30% of the company in question.

However, this method is not applicable to companies experiencing dynamic growth or severe decline. Taking on a minority investor (or even taking a minority stake in a target business with your company) has both pros and cons. While there are some limitations, minority interests can bring advantages to both sides of the table. Before proceeding with a minority interest, it’s essential to understand who’s getting what from the arrangement and design the legal agreements accordingly. Additionally, a minority shareholder needs to proceed cautiously if the business is to be sold in the future. The existing owner may be able to structure the deal to favor the majority owner over the minority.