A minority interest is less than 50 per cent ownership or interest in a company. The word can apply to either stock ownership or a shareholding interest in a company. An investor or other entity other than the parent company holds a minority interest in a company. Minority interests usually come with some of the stakeholder's rights, such as revenue participation and other audit privileges. Show
A minority interest shows up on the balance sheet of companies with a majority interest in a firm as a non-current liability. This reflects the proportion of its minority shareholders held subsidiaries. Understanding Minority InterestsMinority interests are the part of a company or shares that the parent corporation does not own and that have a majority interest. Most minority interests range from 20 per cent to 30 per cent. While the majority stakeholder, the parent company, in most cases, has voting rights to set policies and procedures, the minority stakeholders generally have very little say or influence in the direction of the company. That's why it's called non-controlling interests (NCI), too. In some cases, a minority may have certain rights, such as being able to participate in sales. There are laws which also require holders of minority interests to have some audit rights. They may also be in a position to attend shareholder or partnership meetings. Companies and investors with a minority stake in the private equity environment can negotiate ownership rights. Venture capitalists, for example, might seek to obtain a seat on the board of directors in return for his investment in a company. A company reports minority interests in the business sector on the balance sheet. In addition to being represented on the balance sheet, minority interest is listed as a share of the income belonging to minority equity holders on the consolidated revenue statement. Minority interest refers to the ownership stake held by investors or shareholders who own less than 50% of the total shares or voting rights in a company. As a result, these minority shareholders have less control over the company's decision-making processes and have limited influence. In accounting terms, minority interest represents the value of shares or interests held by shareholders who do not hold a majority stake. These shareholders are also defined as non-controlling interest holders. Moreover, in order to keep its holding position, a parent company must always possess more than 50% of the shares in its subsidiary company. Minority Interest ExplainedMinority interests typically refer to the portion of a company or stock that is not owned by the parent company, which holds the majority interest. This minority stake often falls within the range of 20% to 30% ownership. While the majority stakeholder, usually the parent company, possesses the voting rights and wields influence over policy and decision-making, minority stakeholders, also known as non-controlling interests (NCIs), generally have limited power and influence in shaping the company's direction. In certain cases, minority stakeholders may possess specific rights, such as participating in sales or having access to audit information as provided by relevant laws. They may also have the opportunity to attend shareholder or partnership meetings. Within the field of private equity, companies and investors holding minority interests may negotiate for control rights. For instance, venture capitalists might seek a position on the board of directors in exchange for their investment in a startup. From an accounting standpoint, corporations disclose minority ownership on their balance sheets. Additionally, the minority interest is reported on the consolidated income statement as the share of profit attributable to minority equity holders When a company owns more than 50% (but less than 100%) of a subsidiary, the company records all 100% of the subsidiary’s revenue, costs, and other income statement items, even though the company doesn’t own 100% of the subsidiary. Therefore, when you look at a company’s EV/EBITDA multiple, minority interest (the value of the subsidiary not owned by the parent) has to be added to EV since EBITDA includes 100% of the revenue and expenses from that subsidiary.  To learn more, launch CFI’s financial modeling and valuation courses now! What is Enterprise Value?Enterprise Value or EV is a measure of a company’s worth. As a measure of company worth, it is superior to other measures such as just Equity Market Capitalization and also includes the Market Value of Debt and Minority Interest (now known as Noncontrolling Interest). Enterprise Value is often termed as the takeover price because, in the event of a takeover, EV is the effective selling price of the company. The formula for Enterprise Value is as follows: Enterprise Value = Market value of common stock + Market value of preferred equity + Market value of debt + Minority interest – Cash. What is Minority Interest (Noncontrolling Interest)?Minority interest, or noncontrolling interest (NCI), represents an ownership stake of less than 50% in a company (hence the term minority, or noncontrolling). For accounting purposes, noncontrolling interest is classified as equity and shows up on the balance sheet of the company that owns the majority interest in the subsidiary. To learn more, launch CFI’s financial modeling and valuation courses now! Impact of consolidated reporting requirementsPer various accounting rules, when a company owns more than 50% of another company, then the parent company must usually consolidate its financial statements. If company XYZ owns more than 50% (say 80%) of company ABC, then the financial statements of XYZ reflect all the assets and liabilities of ABC and 100% of the financial performance of ABC. Thus, whether XYZ owns 50.1% or 100% of ABC, the financial statements of XYZ will show 100% of the assets and liabilities of ABC and 100% of the Sales, Revenue, Costs, Profits/Loss, etc. of ABC. However, since the parent company (XYZ) does not own 100% of the subsidiary (ABC), XYZ’s income statement will specify the amount of net income that belongs to the minority shareholders. This account is called Noncontrolling Interest and is also reflected on the balance sheet, as the book value (not market value) of the subsidiary (ABC), the portion of which the parent (XYZ) does not own. Why is Minority Interest included in Enterprise Value calculation?Enterprise Value is primarily used in Valuation Ratios such as EV/Total Sales, EV/EBIT, and EV/EBITDA. Consider the example given above where XYZ owns 80% of ABC. As discussed above, because of accounting regulations, the consolidated financial statements of XYZ will reflect 100% of the Total Sales, EBIT, and EBITDA, etc. of the subsidiary ABC even though XYZ only owns 80% of ABC. For these ratios to be meaningful, the numerator must be adjusted to allow for an “apples to apples” comparison between EV and Total Sales, EBIT, and EBITDA, etc. This is done by adding to Enterprise Value the equity value of the subsidiary that the parent company does not own (the noncontrolling interest). This results in both the numerator and denominator of the various valuation ratios accounting for 100% of the subsidiary company in terms of equity, Total Sales, EBIT, and EBITDA. To learn more, read:
Minority Interest alternative: adjust the income statement insteadAnother way in which we could arrive at a similar result is if we were to only include that proportion of Total Sales, EBIT, and EBITDA in the valuation ratios that the parent company (XYZ) owns in ABC. If we do not wish to add the minority interest to Enterprise Value, we would only include 80% of ABC’s Total Sales, EBIT, and EBITDA in the calculation of the various valuation ratios. The problem with this second method lies in the fact that companies are only required to supply one consolidated Financial Statement and do not provide separate financial statements of all their subsidiaries. To learn more, launch CFI’s financial modeling and valuation courses now! Summary of Minority Interest in Enterprise Value
More ReadingWe hope this has been a helpful guide to minority interest in enterprise value calculations. CFI is the official global provider of the Financial Modeling and Valuation Analyst (FMVA)® certification, designed to transform anyone into a world-class financial analyst. If you’re interested in advancing your career in corporate finance, these articles will help you on your way: Minority interest in Earnings là gì?Lợi ích thiểu số (minority interest) là phần do công ty chi nhánh hay công ty con phát hành, nhưng không thuộc sở hữu của công ty mẹ. Nếu công ty mẹ sở hữu trên 50% cổ phần của chi nhánh, nó có thể kiểm soát công ty đó. Nhưng nếu phần sở hữu của nó dưới 50% người ta phải thừa nhận lợi ích của thiểu số các cổ đông khác. Nón Control Interest là gì?Non-controlling interest (Lợi ích cổ đông không kiểm soát) được định nghĩa là Vốn chủ sở hữu tại công ty con không do công ty mẹ sở hữu trực tiếp hoặc gián tiếp. |
