Share ownership in a private company is usually quite difficult to value due to the absence of a public market for the shares. Unlike public companies that have the price per share widely available, shareholders of private companies have to use a variety of methods to determine the approximate value of their shares.
Key Takeaways
- Unlike public companies that have their price per share readily available, certain methods must be used to value private companies.
- Methods for valuing private companies could include valuation ratios, discounted cash flow (DCF) analysis, or internal rate of return (IRR).
- The most common method for valuing a private company is comparable company analysis, which compares the valuation ratios of the private company to a comparable public company.
- There's also the DCF valuation, which is more complicated than a comparable company analysis.
- Valuation of private shares is often a common occurrence to settle a shareholder dispute or inheritance, or when shareholders are seeking to exit the business.
Some common methods of valuing private companies include comparing valuation ratios, discounted cash flow (DCF) analysis, net tangible assets, internal rate of return (IRR), and many others.
Comparative Company Analysis
The most common method and easiest to implement is to compare valuation ratios for the private company versus ratios of a comparable public company. If you are able to find a company or group of companies of relatively the same size and similar business operations, then you can take the valuation multiples such as the price-to-earnings (P/E) ratio, and apply it to the private company.
For example, say your private company makes widgets and a similar-sized public company also makes widgets. Being a public company, you have access to that company's financial statements and valuation ratios.
If the public company has a P/E ratio of 15, this means investors are willing to pay $15 for every $1 of the company's earnings per share (EPS). In this simplistic example, you may find it reasonable to apply that ratio to your own company.
If your company had earnings of $2 per share, you would multiply it by 15 and would get a share price of $30 per share. If you own 10,000 shares, your equity stake would be worth approximately $300,000.
You can do this for many types of ratios—book value, revenue, operating income, etc. Some methods use several types of ratios to calculate per-share values and an average of all the values would be taken to approximate equity value.
Discounted Cash Flow (DCF) Valuation
DCF analysis is also a popular method for equity valuation. This method utilizes the financial properties of the time-value of money by forecasting future free cash flow (FCF) and discounting each cash flow by a certain discount rate to calculate its present value.
This is more complex than a comparative analysis and its implementation requires many more assumptions and "educated guesses." Specifically, you have to forecast the future operating cash flows, capital expenditures (CapEx), growth rates and an appropriate discount rate.
Valuation of private shares is often a common occurrence to settle shareholder disputes, when shareholders are seeking to exit the business, for an inheritance, and many other reasons.
There are numerous businesses that specialize in equity valuations for private business and are frequently used for a professional opinion regarding the equity value in order to resolve the issues listed.
FAQs
Methods for valuing private companies could include valuation ratios, discounted cash flow (DCF) analysis, or internal rate of return (IRR). The most common method for valuing a private company is comparable company analysis, which compares the valuation ratios of the private company to a comparable public company.
How do you calculate the value of a private company share? ›
Widely considered the most common and simple method of valuing shares in a private company is comparable company analysis (CCA). The process behind CCA involves utilising the metrics and performance of similar stature businesses within the same industry in order to attempt to draw conclusions over valuations.
How do I find out what my shares are worth? ›
Current share prices can be found in any daily financial newspaper or on the internet. You may also be able to find historical share price information on the web and, in particular, the Company's website.
How do you cash out private shares? ›
Employees can sell their shares in a private company, but they need approval from their company first (the issuing firm). The issuing company may buy back the shares or allow an employee to sell their shares to external investors and financial institutions.
Who can do valuation of shares of a private limited company? ›
Only a Merchant banker registered with Sebi can issue the valuation report.
What is the sale of shares in a private company? ›
With a sale of shares, the seller of the shares transfers their shares in a private company to a purchaser. The sale needs to be in accordance with the Companies Act 71 of 2008, the Memorandum of Incorporation of the Company as well as in accordance with any existing shareholders agreement entered into.
How to value a business quickly? ›
A less sophisticated but still popular way to determine a company's potential value quickly is to multiply the current sales or revenue of a company by a multiple "score." For example, a company with $200K in annual sales and a multiple of 5 would be worth $1 million.
How do I sell my shares? ›
Log in to your online investment account: Then, find the shares you want to sell, which you can do online or via an app. Alternatively, you can sell them over the phone.
Can you turn shares into cash? ›
Selling shares in a business can generate significant cash, which can be used to pay down debts or fund investments or charitable donations. Likewise, selling part of a business can reduce the owner's risk and allow them to diversify their personal assets.
How do I sell my shares without a broker? ›
Yes, you can buy/sell stock from/to a friend, relative or acquaintance without going through a broker. Call the company, talk to their investor relations person, and ask who the Transfer Agent for the stock is.
Depending on your circ*mstances, the company's constitution (such as the articles of association and any shareholders agreement) and the financial position of the company, it may be possible to sell your shares back to the company.
What happens when a stock you own goes private? ›
If a company you own stock in goes private, you will no longer own shares in that company or be able to buy them through a traditional broker. For investors, having different types of assets in an investment portfolio may be helpful in case something happens to or changes with one of them.
How long does it take to get the money after selling shares? ›
All equity/stock settlements in India happen on a T+1 basis. When you sell shares, the shares are blocked immediately, and the sale proceeds are credited again on T+1 day. Earmarking of shares was introduced to ensure the securities don't move out of the client's demat account to the broker's pool account.
