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If you want to sell shares in your private company, you will want to know how much they are worth. However, it can be challenging to understand how valuation works from a conceptual perspective. For instance, what is the relationship between the nominal value of your company shares and their market value? This article explains how valuation works from both legal and practical perspectives.
Overview
Shares are a measurement of ownership in a company. Thus, the value of all the shares together should correspond to the company’s value. If you can calculate the total share, you can divide it by the number of existing shares to arrive at the value per share.
Value is the price that another person would be willing to pay for the shares — in other words, its market value. In practice, this value may differ from other valuation methods. Business valuations cannot account for negotiating position, market circumstances, and the seller and buyer’s objectives.
Nonetheless, you must understand the valuation methods and how this translates to valuing your company’s shares.
Why Value Your Shares?
There are several reasons you would want to try and determine the value of your company’s shares. For instance, when raising equity funding, you will need to know how many shares to issue for a given price.
Finally, in the event of a dispute between shareholders, knowing the value of the shares is necessary if an aggrieved shareholder wishes for the other shareholders to buy them out.
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Valuation
It is straightforward enough to understand how to apportion shares to arrive at a figure equating to a percentage of ownership. For instance, if there are 500 shares, 50% ownership is 250 shares. But how do you put a value on each share?
As shares are fundamentally reflective of the value of the underlying business, you should start by understanding what your business is worth.
Business Valuation Methods
Valuing private companies is considered more difficult than public companies. You will want to enlist the expertise of an accountancy firm or corporate financier.
Below are four main valuation methods you should be familiar with, along with their advantages and disadvantages.
|
Valuation method |
Explanation |
Advantages |
Disadvantages |
|
Net Asset Valuations |
Total current liabilities subtracted from total current assets |
Quick and simple |
Does not account for intangible assets like branding or most kinds of intellectual property; not as accurate |
|
Market Multiple |
Earnings before interest, tax, depreciation and amortization (EBITDA) multiplied by figure that estimates future earnings |
Can provide accurate valuation, especially if referenced against the value of similar companies sold |
Relies on certain assumptions about your company’s circumstances that may be subjective and therefore contested by the buyer |
|
Discount Cash Flows |
Your company’s post-tax operating cash flows converted into estimation of future cash generation, then a present value is generated to represent the present value of future earnings |
Accurate and the most used valuation method |
Complex and highly technical; requires lots of financial information |
|
Dividend Yields |
The total amount issues in dividends divided by the price per share |
Fairly easy to calculate |
Rarely accurate for private companies, especially where dividends are issued according to needs of the owner-managers |
Once you arrive at a total value for your business, you can start to think about how much each share is worth by dividing the total number of shares issued.
Squaring the Share’s Market Value With its Nominal Value
In the above example, each share is worth £100. Depending on your intentions, you may want to sell the shares you hold in the company (a share transfer) or issue new shares (a share issuance).
If you are selling the shares through a share transfer, this is a transaction between you and the buyer and does not involve money moving in or out of the company.
However, if issuing new shares, your company is receiving money in exchange for the shares. So in the example above, let us say you found a buyer willing to invest £1m in the company in exchange for equal ownership.
If you are issuing shares of the same class as the ones already issued, it is unlikely that the market value will correspond to the value of the shares recorded at Companies House (nominal value). Often, the nominal value is £1.
There are several ways to square the market value with the nominal value, but businesses often issue the shares at a premium.
Key Takeaways
If you are looking to sell your shares or raise money for your company by issuing an equity fundraising round, you will want to know how to value your shares. This is done by valuing the company, usually by using one of four valuation methods. Next, you will divide this amount by the total number of shares to arrive at the value per share. The price a buyer is willing to pay per share may not always correspond to the valuation method, but it should be a starting point for any negotiations.
If you need help selling your company, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
You will need to determine the value of your company’s business and then divide this figure by the number of existing shares.
Valuing a private company is difficult because there is less information available than a public company. There are several different valuation methods that range from the simple to the complex. You can hire an accountant or corporate financier to examine your company’s operations and determine its value. This figure may be more or less than what a buyer is willing to pay though should inform any negotiations between your company and a potential buyer.
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