United States

Fair value of a noncontrolling interest

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A noncontrolling interest (NCI) arises in a business combination when the buyer acquires more than a 50 percent interest in the target (i.e., a controlling interest) but less than 100 percent of the target. For example, if Company A acquires 70 percent of Company B, and Company A did not previously own any interest in Company B, there would be a 30 percent NCI in Company B that would be recognized in the accounting for the business combination and measured at its fair value. 

When there is an active market price for each unit (e.g., share) of the NCI, its fair value is that active market price multiplied by the number of shares held by the NCI shareholders. No adjustments should be made to this amount. 

When there is no active market price for the shares held by the NCI shareholders, the fair value of the NCI is estimated using one or more valuation techniques, which requires careful and thorough consideration of all the facts and circumstances. Questions that often arise in estimating the fair value of an NCI in the absence of an active market price for the shares held by the NCI shareholders include:

  • Can the consideration transferred by the buyer for its controlling interest be used to extrapolate the fair value of the NCI? 
  • If part of the NCI in the target is purchased by a party other than the buyer at the same time the buyer purchases its controlling interest, can the amount paid by the other party be used to calculate the fair value of the entire NCI? 
  • What factors should be considered in determining whether a discount for lack of control and (or) a discount for lack of marketability is necessary in estimating the fair value of the NCI? 

Each of these questions is explored further in our white paper, Fair value of a noncontrolling interest. While the questions and related discussion in our white paper are focused on estimating the fair value of an NCI when there is no active market price for the shares held by the NCI shareholders, they are also applicable to measuring the fair value of any previously held equity interest (PHEI) the buyer had prior to acquiring a controlling interest when there is also no active market price for that PHEI.