In the business valuation community, a discount is sometimes applied to the equity value of a minority ownership stake in a business. This discount often referred to as a discount for lack of control (“DLOC”), is to account for the various control privileges that a minority owner doesn’t possess. Control shares are normally more valuable than minority shares because they contain a bundle of rights that minority shares do not enjoy.
In Shannon Pratt’s book, Business Valuation – Discounts and Premiums, he discusses the many things a control owner may be able to do that a minority cannot. Some of the more common prerogatives of control include:
- Decide on levels of compensation for officers, directors, and employees
- Decide with whom to do business
- Decide whether to pay dividends and how much
- Register the stock with the SEC for a public offering
- Repurchase outstanding stock or issue new shares
- Make acquisitions or divest subsidiaries or divisions
- Buy, sell, or hypothecate any or all company assets
- Determine capital expenditures
- Change the capital structure
- Amend the articles of incorporation or bylaws
- Sell a controlling interest in the company without input of minority owners
- Select directors, officers, and employees
- Determine policy, including changing the direction of the business
The business model of an ambulatory surgery center (ASC) is rather unique in that the owners are the customers, or rather the owners drive the revenue. More specifically, the minority owners drive the revenue. So, I would venture to say that many of the more recognizable elements of control don’t apply or have much less significance in an ASC business model, versus a traditional enterprise. It’s my opinion that the prerogative of control that carries the most weight is the ability to decide the timing and amount of dividends/distributions. The operating agreement for most ASCs call for regular (usually quarterly) distributions as long as there is a minimum level of working capital on-hand. Furthermore, I believe that the minority members in an ASC oftentimes share many of the same opinions and preferences and sometimes collectively amount to a control interest. I do understand that many ASC developers and hospital systems typically retain a 51% controlling interest in their ASC JVs and developments. But, their operating agreements can also be shareholder-friendly.
The table below shows the elements of control and identifies the prerogatives that, for the most part, are not applicable (N/A) in a typical ASC business entity.
As far as the other elements of control, it’s safe to say that if a controlling member makes such changes to the detriment of the minority members, they run the risk of losing the revenue to the center.
Because of the unusual nature of an ASC, the business appraiser should carefully review the operating agreement and fully understand the make-up of the members and their rights and privileges. Every business valuation is unique and the specific facts and circumstances should be considered when selecting the appropriate level of minority discount if any.