Enterprise Value and Minority Interest
Why do we add back the minority interest when calculating the Enterprise value?
What is Minority Interest?
Minority interest is an accounting concept that refers to a situation when a parent company owns over 50% of another firm. Due to the fact that the parent company has majority ownership of the subsidiary, it includes the assets, income, liabilities etc of the subsidiary in its balance sheet. However, if it does not own 100% of the subsidiary then it does not actually have claim to 100% of the financial performance, and whatever percentage it does NOT own must be subtracted as a liability.
Adding Minority Interest in the Enterprise Value (EV) Formula
First, let's review the Enterprise Calculation.
The calculation for Enterprise Value is:
Market Capitalization + Debt + Minority Interest + Preferred Shares - Cash & Cash Equivalents
With that being said, minority interest is an important factor in Enterprise Value. If the company being valued has majority ownership in another company, whatever percentage it does NOT own must be added on to equity value because the parent company will not have all of the claim on assets, income etc of the subsidiary.
Another way to think of it is that since you are accounting for the full subsidiary throughout the financial statements - if we want to look at metrics such as EV/Revenue or EV/EBITDA the Enterprise value needs to account for the value of the main company and the subsidiary since the denominator accounts for the main company and the subsidiary. This allows you to compare apples to apples rather than apples to oranges.
Read More About Enterprise Value On WSO
- How Tax Rate Affects Enterprise Value (EV)
- Enterprise Value Less Than Equity Value
- Enterprise Value Interview Questions For Banking
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