Minority interests are usually the result of joint ventures or acquisitions where the selling party maintains some interest or control in the business. According to U.S. accounting rules, when a company acquires more than 50% of another firm, the buying party needs to account for all profits, assets and liabilities in its financial statements. It cannot take credit for the percentage of those items that remain with the minority interest, though.

To illustrate, suppose that Company Red acquires Company Blue, but Company Blue retains 15% of the shares. Company Red can't claim the assets of Company Blue as its own, but it still has to reflect the impact of minority interests on its income statement. This changes the formula for calculating enterprise value for Company Red.

Minority Interest

In financial accounting, minority interests are considered non-current liabilities on a balance sheet. They also impact the balance of assets and liabilities on the income statement. If a parent company takes part in any further consolidations, especially if the parent company is being bought out by another party, the minority interest becomes an important variable in the enterprise value.

Enterprise Value

The enterprise value is a hypothetical money value assigned to a firm, designed to take into consideration all claims on assets from all possible claimants. It is often considered a more detailed and realistic version of market capitalization when pricing a possible acquisition, but it has its detractors as well.

In a simple, standard enterprise value calculation, the company's market capitalization is combined with the outstanding debt remaining on company books. Any acquiring firm must pay off the debt of its new business. Any cash on hand or liquid cash equivalents are subtracted as well. The acquiring company assumes any liquid assets, which offsets some of the purchase costs.

When pre-existing minority interests are involved in a consolidation, the enterprise value must take into consideration the impact of those interests. The market capitalization formula does not include minority interests. Any acquiring firm still has to pay for minority interest, so the total value of the minority interests are added to market cap and debt before excess cash is taken out.

The formula for calculating enterprise value in cases that involve minority interest can be written as:

Enterprise Value = Market Capitalization + Outstanding Debt + Value of Minority Interest - Excess Cash on Hand - Cash Equivalents

In most cases, the minority interest does not significantly impact financial results. When investors want to calculate the enterprise multiple or similar fundamental ratios, minority interests need to be added to enterprise value there as well.

Hypothetically, it could be possible to subtract the portion of earnings or earnings before interest, taxes, depreciation and amortization (EBITDA) owed to the minority interest from the parent company before performing some of the calculations. Often, however, the minority interest is not a public company and does not have to face public reporting standards. It would be too difficult to find the specific financial separation, so this method of forming enterprise value is the most efficient proxy.

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