Abstract

Imagine the following two valuation scenarios:

• You are retained to value two interests in an S corporation for a possible acquisition of either shareholder by the other shareholder: a 49.5% interest, and a 50.5% interest. There is a shareholder agreement that directs valuation to be done at the fair market value of the interests.

• You are asked to value a 40% interest in an S corporation for purposes of the company redeeming a shareholder's interest at its fair market value. You complete your engagement. After completion, the company tells you that they have negotiated with the shareholder and will be acquiring the interest for a proportionate piece of the whole. They ask you to value the entire S corporation and, in your conclusion, ask you to indicate the proportionate value of the 40% interest.

What does the analyst do? For many analysts who continue to hold to the notion that S corporation adjustments only apply to minority interests, in the first example, the value of the 49.5% interest could be higher than the 50.5% interest, and in the second example, the minority valuation of the 40% interest could be higher than the proportionate piece of the whole (ignoring minority and lack of marketability discounts). Both of these real world assignments beg the question: Does this make sense?