Minority interest, from consolidation to EV
Minority interest, called noncontrolling interest under US GAAP and IFRS, is the part of a subsidiary's equity owned by someone other than the parent. When a parent controls a subsidiary it reports all of the subsidiary's revenue and EBITDA, so enterprise value must add the outside owners' stake to stay on the same basis. In our example, leaving it out makes the group look like 6.50x EBITDA instead of 7.10x. Soreno, an AI voice interview practice app for consulting, investment banking and other finance candidates, runs a free enterprise value calculator with no sign-up, and mock technical interviews where an AI interviewer asks you to build the bridge out loud.
Updated
- Two names, one thing. Minority interest is the older name for noncontrolling interest.
- It comes from consolidation. Control means 100% of the subsidiary's numbers, even below 100% ownership.
- It sits in equity. Separate from the parent's equity, with its own share of net income.
- Add it to enterprise value. Market value if you can estimate it, book value if not.
- Twelve questions below. Short answers in our words and the follow-ups to expect.
Noncontrolling interest in three examples
Every company and number here is invented by Soreno for practice, in millions of dollars. A parent owns 70% of a subsidiary and controls it. The subsidiary has $500 million of revenue, $100 million of EBITDA, $40 million of net income and $300 million of book equity. The parent's own business, outside the subsidiary, earns $300 million of EBITDA and $110 million of net income. We leave out any purchase accounting on the stake to keep the book numbers simple.
Example 1: where the number comes from$12 million of income, $90 million of equity
1. Consolidate everything
EBITDA $400 million
Control means the parent reports the subsidiary's numbers in full, not 70% of them: $300 million + $100 million = $400 million of EBITDA, and the subsidiary's whole $500 million of revenue.
2. Split net income
$12 million to outside owners
Consolidated net income is $110 million + $40 million = $150 million. Outside owners hold 30% of the subsidiary, so 30% × $40 million = $12 million is attributable to them and $138 million to the parent. EPS uses the parent's $138 million.
3. On the balance sheet
$90 million in equity
30% × $300 million = $90 million, shown inside equity but separate from the parent's equity. All of the subsidiary's assets and liabilities are on the parent's balance sheet.
4. Cash flow
Starts from consolidated net income
The cash flow statement starts from the $150 million that includes the outside owners' share. Dividends the subsidiary pays them show up in financing.
Example 2: the enterprise value bridge7.10x with it, 6.50x without
The parent's diluted equity value is $2,000 million and its consolidated net debt $600 million, of which $100 million sits in the subsidiary. Similar companies trade at 9x EBITDA, which we use to value the subsidiary.
1. Without NCI
6.50x
$2,000 million + $600 million = $2,600 million, ÷ $400 million = 6.50x. The numerator holds only 70% of the subsidiary's equity while the denominator holds 100% of its EBITDA.
2. With book NCI
6.72x
Add the $90 million from the balance sheet: $2,690 million, 6.72x. Quick, but book value can be far from what the stake is worth.
3. Value the stake
$240 million
Subsidiary EV 9x × $100 million = $900 million, less its $100 million of net debt = $800 million of equity. Outside owners hold 30%: $240 million.
4. With market NCI
7.10x
$2,000 million + $600 million + $240 million = $2,840 million, ÷ $400 million = 7.10x. Using market value where we can is our preferred convention. Some data screens use book value, so check which one you are looking at.
5. The other way
Parent alone at 6.47x
Or take the subsidiary out of both sides. Equity value $2,000 million less the 70% stake's value ($560 million) plus only the parent's own net debt ($500 million) is $1,940 million, over the parent's own $300 million of EBITDA: 6.47x. Add the subsidiary's $900 million back and you are at $2,840 million again.
Example 3: buying 80% of a companyGoodwill $280 million
A buyer pays $800 million for 80% of a target whose identifiable net assets are worth $700 million at fair value. An appraiser values the other 20% at $180 million, less per share than the buyer paid, because those holders don't get control. Two years later the buyer buys that 20% for $230 million, keeping control throughout.
1. US GAAP
NCI at fair value, $180 million
FASB's business combinations standard (Statement No. 141(R), December 2007, now in ASC 805) requires the noncontrolling interest to be measured at its acquisition-date fair value. Goodwill = $800 million + $180 million − $700 million = $280 million.
2. The discount
10% below the buyer's price
The buyer's price implies $1,000 million for 100%, or $200 million for 20%. The $180 million fair value is 10% less. That gap is what the buyer paid for control.
3. IFRS choice
Or $240 million of goodwill
FASB's 2007 standard describes the revised IFRS 3 as letting the buyer choose deal by deal between fair value and NCI's proportionate share of identifiable net assets. The second gives 20% × $700 million = $140 million of NCI and $800 million + $140 million − $700 million = $240 million of goodwill.
4. Buying the rest
No gain, no new goodwill
Buying out the 20% while keeping control is an equity transaction. NCI of $180 million disappears, cash falls $230 million, and the $50 million difference comes out of the parent's equity, ignoring two years of earnings allocated to NCI in between. Goodwill doesn't change.
From FASB Statement No. 160 (December 2007), Noncontrolling Interests, now in ASC 810, FASB Statement No. 141 (revised 2007), Business Combinations, now in ASC 805 and IFRS Foundation: IFRS 10 Consolidated Financial Statements.
What the interviewer checks on minority interest
In our experience it comes up as a one-line why, then a follow-up that tests whether you understand consolidation.
Matching
EBITDA includes 100% of a controlled subsidiary, so enterprise value must too.
Where it sits
In equity, separate from the parent's, with its own slice of net income.
Book or market
Book value is quick. Market value is more accurate when the stake is worth much more than its book amount.
The mirror case
An equity method stake brings no EBITDA in, so it comes out of enterprise value instead.
12 minority interest interview questions
The short answers are ours. The note says what a strong answer adds.
Enterprise value4 questions
Why do you add noncontrolling interest to enterprise value?
Show follow-ups
Short answer. Because consolidated EBITDA and revenue include 100% of a controlled subsidiary. Adding the outside owners' stake puts the numerator on the same basis.
Gives the mirror case for equity method investments. Practice it, see a model answer
What is the difference between enterprise value and equity value?
Show follow-ups
Short answer. Equity value is the parent's shareholders' stake. Enterprise value adds debt, preferred stock and noncontrolling interest and takes off cash.
Names each item and why it is there. Practice it, see a model answer
Should you use book or market value for noncontrolling interest?
Show follow-ups
Short answer. Market value when you can estimate it, since enterprise value is a market number. Book value is a fallback when the stake is small.
Works the difference on numbers, as example 2 does.
Do unfunded pensions or leases belong in enterprise value?
Show follow-ups
Short answer. In our experience bankers often add them when they are debt-like and the earnings measure is before their cost. The rule is the same as for NCI: both sides on one basis.
Says the choice must match the multiple's denominator. Practice it, see a model answer
Accounting4 questions
Where does noncontrolling interest appear on the financial statements?
Show follow-ups
Short answer. In equity on the balance sheet, separate from the parent's equity, and as a line splitting consolidated net income between the parent and the outside owners.
Says which net income EPS uses.
How do you account for a 30% stake in another company?
Show follow-ups
Short answer. Our question page covers it. For this topic the point is that a stake the company doesn't control brings none of its EBITDA into the consolidated numbers.
Contrasts it with a 70% stake that is consolidated. Practice it, see a model answer
A parent buys out the minority holders. What happens?
Show follow-ups
Short answer. If it already had control, it is an equity transaction: noncontrolling interest goes away, cash falls, and the difference goes through the parent's equity. No gain or loss and no new goodwill.
Works one number through, as in example 3.
Why is the minority stake worth less per share than the buyer paid?
Show follow-ups
Short answer. The buyer paid for control. Minority holders don't get it, so their shares are often worth less per share.
Ties it to the control premium. Practice it, see a model answer
In models4 questions
How does noncontrolling interest affect EPS?
Show follow-ups
Short answer. EPS uses net income attributable to the parent, after taking off the outside owners' share.
Says what that means in a merger model with a partly owned target.
How is goodwill measured when a buyer gets less than 100%?
Show follow-ups
Short answer. Under US GAAP, price plus the fair value of the noncontrolling interest, less the fair value of identifiable net assets. IFRS allows NCI at its share of net assets instead.
Works both numbers.
Walk me through a merger model.
Show follow-ups
Short answer. Combine the income statements, add the deal's interest and purchase accounting, take off any noncontrolling interest's share, and divide by the new share count.
Places NCI in the right line. Practice it, see a model answer
Walk me through a comparable company analysis.
Show follow-ups
Short answer. Pick peers, build each one's enterprise value, with noncontrolling interest, and EBITDA on one basis, then apply the median and range to the target.
Flags peers with large partly owned subsidiaries. Practice it, see a model answer
More to prepare with
Common minority interest mistakes
Subtracting it
In the bridge from equity value to enterprise value it is added, like debt.
Consolidating only the owned share
Control means 100% of the subsidiary's numbers. The parent reports $100 million of its EBITDA, not $70 million.
Book value without checking
In example 2 book NCI is $90 million and market value $240 million.
Using consolidated net income for EPS
EPS uses the parent's $138 million, not $150 million.
Booking a gain on a buyout
Buying out minority holders while keeping control is an equity transaction.
Build the bridge out loud
Soreno's AI interviewer asks why noncontrolling interest goes into enterprise value, then pushes on book versus market value and the equity method mirror case. You get a scored report on your answer.
Questions people ask
What is minority interest?
The part of a subsidiary's equity that the parent doesn't own. FASB's Statement No. 160 defines noncontrolling interest, sometimes called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.
Is minority interest the same as noncontrolling interest?
Yes. Noncontrolling interest is the term US GAAP and IFRS use now. Bankers still say minority interest.
Where is noncontrolling interest on the balance sheet?
Under FASB's Statement No. 160 it is presented within equity, separate from the parent's equity, and consolidated net income is split between the parent and the noncontrolling interest on the face of the income statement.
Why does a parent consolidate a subsidiary it doesn't fully own?
Because it controls it. The IFRS Foundation's summary of IFRS 10 says a parent that controls other entities presents consolidated statements, showing the group's assets, liabilities, equity, income, expenses and cash flows as those of a single economic entity.
Do you add or subtract minority interest to get enterprise value?
Add it, going from equity value to enterprise value. Going the other way, from enterprise value to equity value after a DCF, subtract it.
What happens when a parent sells part of a subsidiary but keeps control?
FASB's Statement No. 160 treats changes in ownership while the parent keeps control as equity transactions, so there is no gain or loss in net income.
Keep going
- Enterprise value calculator
- Why add noncontrolling interest to EV
- Valuation interview questions
- Accounting interview questions
- Three statement accounting questions
- Free DCF model template
- M&A valuation, worked
- See a real sample report
- Purchase price allocation
- Fully diluted shares
- What is goodwill in accounting