David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services including business valuation, fraud investigation, and fraud deterrence programs in Philadelphia and the Delaware Valley.
Under what conditions does $4 million divided by four NOT equal $1 million? When you are a 25 percent owner of a privately held business, sometimes the math just doesn’t work out the way you’d like it to.
According to David Anderson, of David Anderson & Associates – a Philadelphia forensic accounting firm that provides a full range of business valuation and other forensic accounting services in Philadelphia and the Delaware Valley – experts who are asked to determine the worth of individual shareholder stakes in such a privately held operation consider factors that can significantly reduce the value of an individual’s holdings.
“There are two key factors that can impact the value of a privately held business — lack of marketability and lack of control,” Certified Valuation Expert Anderson said. “Depending on the circumstances, they can pull the value down by as little as 10 percent or less to as much as 90 percent or more. This is definitely something you want to consider if you own shares in a privately held company or are thinking about buying or selling this type of shares.”
Anderson said lack of marketability refers to the difficulty of selling shares in a privately owned business. While it is easy to sell shares in a publicly traded company simply by contacting a stockbroker to handle the transaction, the same is not true for a privately held company, he said.
“There is no ready market for the shares of a privately held company,” said Anderson, a business valuation expert in Philadelphia. “Selling these shares usually requires the services of a business broker and even using a broker takes time. Of course, the longer it takes to sell the shares, the less the value they hold because they are tying up your money. If the shares could be sold immediately, you would have the option to reinvest the proceeds immediately.”
In addition, Anderson explained, unless the privately held business pays regular distributions or dividends, the shareholder does not receive interest or dividends on the investment while the stocks are being sold.
A business broker also is likely to require a greater commission or fee to sell shares of a privately held company than a stockbroker would charge for selling shares of a publicly held company, according to Anderson, a business valuation expert in Philadelphia and the Delaware Valley. Finally, he said, if the ownership stake is subject to a shareholder’s agreement, the agreement may contain additional restrictions on the sale of shares.
“A Certified Valuation Analyst must consider each of these issues to determine the amount of discount that will be applied to the shares due to the lack of marketability,” Anderson said.
Lack of control — the other key factor a business valuation expert must consider in determining the worth of a privately held business — refers to the inability of a minority shareholder to make key decisions affecting the company, Anderson said. For example, he said, a majority shareholder can set salaries, benefits and bonuses or decide to sell part or all the company. A minority shareholder lacks the power to make those decisions and usually lacks the ability to compel or influence others to make them.
Because of this lack of control, the business valuation expert will further discount the pro-rata value of the interest to satisfy the expectations of potential buyers.
“A business valuation expert must analyze the lack of marketability, the lack of control and many other factors to determine a reasonable discount and, consequently, the true value of your shares,” Anderson said.
If you need a business valuation professional in Philadelphia, or if you require any other services of a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst and a Certified Fraud Examiner in Philadelphia.
