Why 20% of a Company May Be Worth Less Than 20%

Editor’s Note: An ownership percentage tells you how much of a company someone owns, but not necessarily what that stake is worth. A person may own 20% of a private company and still have little say over distributions, management, or the sale of the business. The same owner may also face transfer restrictions or a very small pool of possible buyers. Those limits do not automatically justify a discount. They do, however, show why a simple pro rata calculation may not truly capture the economics of the interest. The better starting point is to understand the interest itself: what rights come with it, what cash it can reasonably produce, and how readily it can be sold.

Ownership Percentage Is Only Part of the Picture

Ownership percentage answers one question: how much of the company does the holder own? It does not, by itself, answer what that interest is worth. In a private company, the answer can turn on voting rights, expected distributions, transfer limits, the governing documents, and the standard of value that applies to the assignment.

Ownership percentage is therefore only the opening fact in the analysis. A proper valuation, therefore, has to move beyond the cap table and ask what the shares actually allow the holder to receive, influence, and sell.

Control Has Economic Value

A minority interest may carry fewer practical powers than a controlling stake. That difference is the basis for what valuers often call a discount for lack of control. That does not mean minority shares are always worth less. The question is whether the holder lacks powers that a controlling owner could use to affect the company’s economics.

Those powers can include choosing directors, influencing management, setting compensation, approving major transactions, deciding whether to distribute cash, changing governing documents, or determining when the company should be sold. The governing documents and applicable law can alter that list, which is why the percentage alone is not enough.

A simple example shows why a minority stake may not track its pro rata share of the company’s value. John Schumacher of True Financial POV illustrates the point with a practical example. If a family pays about $1 billion for a business and later offers an outside investor a 10% stake, the investor does not automatically have to value that stake at $100 million. Schumacher explains that “one of the reasons why you’d likely be paying less is for this minority interest discount.” The buyer would own 10%, but the remaining owners would still control the decisions that matter.

This is also where a buy-sell agreement becomes important. A well-drafted agreement can establish who may buy the interest, how an exit will work, how value will be determined, and whether discounts are part of the calculation. If those points are left undefined, a valuation question can quickly become an ownership dispute.

Lack of Control Is Not the Same as Lack of Marketability

Control and marketability address different limitations. Control concerns the holder’s ability to influence company decisions. Marketability concerns the holder’s ability to turn the interest into cash without an unreasonable delay or price concession. A shareholder may hold an economically sound interest and still have no practical market in which to sell it.

Liquidity raises a different question: even a valuable interest may be hard to sell if there are too few buyers. Ashok Abbott of West Virginia University describes the issue as whether there is “enough number of buyers in this marketplace to absorb this supply.”

Contractual limits can create a separate obstacle. The holder may need consent before a transfer, may have to offer the shares to an existing owner first, or may be unable to sell for a stated period.

A discount for lack of marketability, commonly shortened to DLOM, may therefore be relevant even when the operating business is doing well, the seller has control, and there are no contractual transfer restrictions. The analysis should include the company’s financial condition, the size and regularity of distributions, the likelihood of a future liquidity event, transfer restrictions, redemption rights, management quality, the available buyer pool, and the rights carried by the particular shares.

In a private company business divorce, those points can become especially important because an owner may lack both decision-making power and a realistic exit route. They are separate concerns and should be analyzed separately.

The Standard of Value Comes First

Before anyone debates the size of a discount, the parties should first identify what kind of value the assignment calls for. Fair market value, fair value, and investment value may sound similar, but they can lead the analysis in different directions.

The applicable standard of value can change the analysis before any discount is considered. Brandi Ruffalo of Valuation & Forensic Partners puts the broader point plainly: “In everything in valuation, the devil is in the details.”

For valuation purposes, fair market value asks what price would likely emerge in an arm’s-length transaction between properly informed parties, neither of whom is being forced to act. Ruffalo also notes that the federal tax concept traces to an IRS revenue ruling from 1959. Under that framework, the rights and restrictions attached to the interest can affect the conclusion.

Fair value can be defined differently because its meaning may come from a statute, an accounting rule, or a judicial decision. Depending on the governing authority, a minority or marketability discount may be accepted, limited, or not used at all. Investment value asks a different question because it focuses on a particular buyer. A strategic purchaser that expects identifiable synergies may be willing to pay more than a financial buyer focused solely on the investment on a stand-alone basis.

Do Not Charge the Same Risk Twice

The valuation method can already capture some of the risks that later appear in a discount discussion. Under an income approach, the valuer develops expected cash flows and converts them to a present amount using a rate that reflects risk. A market approach may instead draw on public-company trading data or transaction multiples. In either case, the key question is what economic characteristics have already been built into the starting value.

The same weakness should not reduce value more than once. If financial trouble has already lowered projected cash flows and raised the discount rate, another adjustment for the same concern can overstate the reduction. Schumacher warns against “double-counting or triple-counting these things.” The assumptions, methodology, and final adjustments should be consistent with one another, rather than layering multiple reductions for the same risk.

The same care is needed when financial statements are the starting point. Book values under GAAP do not necessarily equal fair market value, and the balance sheet is not a substitute for a valuation of the business or the ownership interest.

Market Studies Help, but They Do Not Supply the Answer

Pre-IPO transactions and restricted-stock studies can provide useful evidence about the cost of limited marketability. They are better used as reference points than as ready-made percentages to be applied to an unrelated company.

Tesla’s 2010 IPO to show the problem. A comparison between a pre-IPO stock grant and the post-IPO price yielded a possible implied marketability discount exceeding 40%. Yet the price difference may reflect more than marketability. Company performance, market conditions, or assumptions used in the earlier valuation may also have changed during the interval.

Restricted-stock transactions require the same caution. A deal may include warrants or other rights. The issuer may be under financial pressure. The public stock may trade only lightly. The private investor may also have information that is not reflected in the public price. Abbott identified the expected time to liquidity and price volatility as additional factors that can affect the observed discount.

There Is No “Typical” Discount That Ends the Analysis

An average from a study can be tempting because it turns a difficult judgment into a quick calculation. That shortcut is where problems begin. A discount needs a connection to the company and to the interest being valued, not merely to a percentage reported in a database.

An average percentage cannot do the work of a company-specific analysis. As Ruffalo summarizes, “Discounts are fact-specific. They’re not formulaic.” The work should therefore begin with the actual ownership rights, governing documents, cash flow expectations, legal standards, likely buyers, and available routes to liquidity. Only after those pieces are understood should the valuer decide whether an additional adjustment is warranted.

Value the Interest That Actually Exists

A 20% stake may be worth less than one-fifth of a company valued on a controlling basis, but that conclusion requires an economic rationale. An owner who cannot influence distributions, direct management, freely transfer shares, or choose the timing of an exit holds a different bundle of rights from that of an owner of freely traded public stock.

The opposite point matters just as much. “Minority” is not a command to apply a large discount. The percentage is only the first piece of information. The real analysis asks what the holder can control, what cash may reach the holder, how the interest can be transferred, how long an exit may take, and whether those risks have already been recognized elsewhere in the valuation.

This approach takes more work than choosing a number from a table, but it produces a conclusion that can be explained and defended. In private company valuation, rather than asking what discount rate usually appears, it is more useful to ask what the specific interest, with its actual rights and restrictions, is worth in the circumstances being measured.

To learn more about this topic, view Minority and Illiquidity Discounts. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with Financial Poise Faculty. Read more about valuation on Financial Poise.

This article was originally published on [September 28, 2026].

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