The concept of minority interests is crucial to master if you want to excel in investment banking, an investment fund, a Transaction Services firm, or a Corporate M&A team. Minority interests are a key factor in calculating Enterprise Value or bridging Equity Value to Enterprise Value. This topic will frequently arise when valuing companies. Moreover, it is a common technical question during job interviews for internships or junior analyst positions. Therefore, understanding the definition of minority interests is in your best interest. This article is designed to help you learn more about minority interests.

What Are Minority Interests?

Minority interests (also referred to as “Non-Controlling Interests”) represent the portion of a company’s equity that is not owned by the parent company. Specifically, minority interests exist when the portion not held by the parent company is less than 50% of the total equity. In contrast, majority interests (or “Controlling Interests”) refer to the portion owned by the parent company, which must be greater than 50% and less than 100% to qualify as “majority interests.” For instance, holding a 51% stake in a company ensures control while sharing risks with minority shareholders.

Types of Minority Interests

Minority interests can be categorized as active or passive:

• Active Minority Interests: Represent between 21% and 49% of a company’s equity. These are considered “active” as they can influence the company. Active minority interests pass part of their dividends and net income up to the parent company.
• Passive Minority Interests: Represent less than 20% of a company’s equity. These are deemed “passive” as they have little influence on the company. Only a portion of the dividends earned by passive minority interests is passed up to the parent company.

Accounting for Minority Interests

When consolidating financial statements, a company cannot account for the entire value created by its subsidiary. Only the portion corresponding to the parent company’s stake is considered.

Example: If Company A owns 60% of Subsidiary B, Company A consolidates only 60% of Subsidiary B’s output in its financial statements. The remaining 40% is attributed to the minority shareholders.

How to Calculate Minority Interests

Calculating the value of minority interests involves two steps:

Impact on the Balance Sheet (Accounting Approach)

Minority interests affect the consolidated balance sheet of a company. To determine the amount, multiply the book value of the subsidiary by the percentage owned by minority shareholders.

Minority Interests = Company’s Book Value * Minority Shareholders’ Ownership Percentage

Example: If the book value of Subsidiary B is $100M and minority shareholders own 40%, minority interests will be $40M ($100M × 40%). This amount is reported under shareholders’ equity as “Minority Shareholders’ Equity.”

Impact on Net Income

Minority interests also affect the consolidated income statement. To calculate this, multiply the subsidiary’s net income by the minority shareholders’ ownership percentage.
Minority Interests = Net Income * Minority Shareholders’ Ownership Percentage

Example: If Subsidiary B generates a net income of $20M and Company A owns 60%, minority shareholders own 40%. The value of minority interests will be $8M ($20M × 40%). This is reported in the consolidated income statement under “Net Income Attributable to Minority Interests.”

Why Calculate Minority Interests?

The calculation of minority interests is essential for:

• Financial Statements: Properly defining minority interests is crucial for consolidated financial statements, as it impacts both net income and shareholders’ equity.
• Company Valuation: Minority interests are integral to calculating Enterprise Value from Equity Value. Enterprise Value is a key metric for valuations using market multiples or transaction multiples.

Enterprise Value = Equity Value + Debt + Preferred Stock + Minority Interests – Cash & Cash equivalents

Methods of Consolidation and Minority Interests

Consolidation is a natural outcome of mergers and acquisitions. While expertise in consolidation is not required for investment bankers, a basic understanding can be advantageous. Below are the main consolidation methods:

• Full Consolidation: Applicable when the parent company owns more than 50% of a subsidiary. All income statement and balance sheet items (except equity) are consolidated 100%. Minority interests are reported under net income and equity.

• Equity Method: Used when the parent company owns 20%-50% of a subsidiary. Only the proportional share of net income and equity is consolidated.
• Proportional Consolidation: Applied for joint ventures. Income statement and balance sheet items (except equity) are consolidated proportionally to ownership. For instance, a 50-50 joint venture is consolidated at 50% for both owners.

Example of a Joint Venture (JV): A joint venture is a company created by two or more firms to collaborate on a project. They share profits and risks. For example, in 2001, Sony Ericsson was a JV between Sony & Ericsson to combine Sony’s expertise in consumer electronics with Ericsson’s mobile communication technology. This partnership lasted until 2012, when Sony bought out Ericsson’s stake and took full control of the business, renaming it Sony Mobile Communications.