Best Practices in Accounting for M&A Transactions (Part 2)

Valuing Non-Controlling Interest in Private Equity and Public Company Transactions

By: Edward Hamilton | PJ Patel | Charles Sapnas

In the second episode of our video series on best practices in accounting for M&A transactions, PJ Patel, Charles Sapnas, and Ed Hamilton share their experience with valuing non-controlling interest in private equity and public company transactions.

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Video Chapters:
0:03 Valuing Non-Controlling Interest in Private Equity Deals

1:50 Step Acquisitions and Purchase Price Allocations

2:24 Case Study: Non-Controlling Interest to Controlling Interest, Crosses Materiality Threshold

[Transcription]

Valuing Non-Controlling Interest in Private Equity and Public Company Transactions

[PJ] So, Charles, another item that we’re seeing more regularly today is where the seller is retaining a piece of the company going forward, and we’re seeing that on the private equity side, as well as on the public company side, as well. On the public company side, it’s non-controlling interest that needs to be valued and that sort of thing. But maybe you can touch first on private equity and what you see in that space.

 [Charles] Yeah, I think it’s less common in private equity, but we are seeing it in certain industries and certain types of deal structures. So, with respect to a non-controlling interest versus rollover equity, the key consideration is “what is the security that those shareholders have post-transaction?” With a rollover, the shareholders that are rolling equity have a different security, they have a security in a new company, once they roll.

In a non-controlling interest, the shareholders retain equity, so they have the same stock that they had before the transaction. And the valuation considerations, when we look at rollover equity versus a non-controlling interest, can be very different.

[PJ] It’s interesting, because I feel like, at least in the PE space, we rarely saw that five or ten years ago. But today, in this environment, we’re seeing that a lot more frequently. And I think on the public company side, we’re seeing that from time to time as well. And for public companies, there’s a requirement to fair value that non-controlling interest. Do you want to touch on that at all?

[Ed] I think it’s idiosyncratic. I, personally, haven’t seen it in several years. The vast majority of transactions are outright control. I think of other ones I’ve seen around here and have been familiar with, and it has generally been transactions where it’s not necessarily non-controlling interest but more of a step acquisition where, for one reason or another, the transaction did not take place at one point in time, but 5% and none that I’ve personally been involved with.

[PJ] But you did bring up an interesting point there on step acquisitions. That’s another item that is critical to understand and determine the purchase price. I had a situation a couple of years ago, where the company thought they were doing a transaction that was immaterial. But it was they were going from a non-controlling interest to a controlling interest, and that was crossing the materiality threshold. And, all of the sudden, they had to do a purchase price allocation, account for the transaction, and so what they thought was, in that situation, maybe a $5,000,000 transaction was actually over a $50,000,000 transaction.