Understanding how to calculate the share value of a private company is a significantly more involved and difficult process than for a public company. A public company can work out its value by simply multiplying its current stock price by its current shares.
However, private companies do not have their stocks listed on an exchange, making it incredibly difficult to determine a fair value.
There are many possible reasons to calculate share value. One of the most common is that a shareholder or business partner may wish to exit a company, and wants to receive a fair value for their remaining shares should they wish to offload them, or that there is a dispute between the shareholders or partners..
It is also not uncommon for the act of valuing shares to lead to a commercial dispute which can cause rifts within companies and affect operations. Thankfully, this is something that forensic accounting can help with.
What is Fair Value of Shares?
The fair value of shares describes the value attributed to a certain stock by a willing buyer/seller. The vagueness of this valuation is because, unlike market value, fair value does not truly have a clear basis, it is instead determined by the particular circumstances surrounding the sale, and the businesses involved.
In almost all cases, an independent valuer will be tasked with arriving at a fair value that suits both sides prior to sale of shares taking place.
When determining the fair value of shares, often the first step will be to consult with a company’s articles of association. It is common for such articles to clearly set out what ‘fair value’ is in a scenario — this however is not always the case so assumptions should not be made.
The fair value of shares can also be relevant in shareholder disputes where both parties disagree on the fair value of company shares. Often in this circumstance, the fair value will either be determined by what factors are deemed important by your valuer or the court, depending on the situation.
How Do I Calculate the Value of My Shares?
Understanding precisely how to calculate the share value of a private company is often incredibly difficult. This is due to a number of factors, but most of all it is down to the lack of a public market. Public companies all have their share price readily available at all times. When it comes to private companies, tactics such as comparative company analysis and discounted cash flow come to the fore.
Valuing private shares can be an important step in resolving a shareholder dispute, and understanding the key methods can be vital.
Comparable Company Analysis
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.
This is done under the base assumption that similarly sized businesses in the same industry will have similar valuations.
An expert, such as a forensic accountant, will be hired by a representative or shareholder of the private company in question, they will then collate a detailed list of relevant business, and analyse statistics for each of them to compile valuation ratios that in turn can help to form an average to base the company share valuation on.
Company valuation ratios are a method of determining whether a business is overvalued or undervalued within its market, depending on if its ratio is high or low.
Discounted Cash Flow Valuation
Alongside CCA, discounted cash flow (DCF) valuation is one of the more widely used methods for share valuation.
This particular method aims to formulate a value based on expected future cash flow. The goal of DCF is to attempt to estimate the current share value of a business based on projections of how much income it could generate in the future.
The purpose of DCF as a method is to estimate the possible future return on an investment, taking into account the time value of money, which states that money today is worth more than money tomorrow because you can invest money you have today today.
When it comes to DCF, the main drawback is that it relies too heavily on assumptions. It requires as accurate estimates as possible, when the market can always be prone to fluctuation, affecting future share value.
Factors that could affect future cash flow could be:
- Falling/rising demand
- Increasing/decreasing industry competition
- Economy health
- Future innovations
- Disruption
Value of Shares: Other Factors Worth Consideration
To properly answer the question, “How do I calculate the value of my shares?” it can be useful to delve deeper than valuation. A number of other factors, including shareholding size, veto rights, and business plans, can also have an impact. Effectively, the better you understand the wider picture, the more accurate the valuation is likely to be.
Some of the more common factors to look out for include:
- Shareholding Size: Sales within a bigger shareholding could affect the overall market price, which could lead to the price coming down.
- Voting: Voting rights affect your ability to make key decisions, such as profit sharing and asset sales. Therefore, increased voting rights are regarded as being more valuable.
- Veto: Depending on the contents of articles of association, shareholders with 25% (or less) of total shares could have ample power to veto decisions.
- Right to Appoint a Director: The ability to appoint a director puts a shareholder in a more powerful — and therefore valuable — position.
- Total Shareholders: The proportional makeup of the shares is critical, as being a 10% shareholder would carry more weight if nine other people also owned 10% — as everyone would have an equal say. This would make your investment much more valuable than if two other people owned the remaining 90%.
- Ease of Sale: Another important factor for anyone wondering, “How do I value my shares?” is how easily they could eventually be sold. This will be influenced by any legal restrictions on the mechanism for selling, with limitations tending to reduce share value.
- Potential for Income: Any expected increase in profits — due to a new service, or change of operations — could significantly boost share value.
- Tactical Worth: Even a minority shareholding could theoretically influence the future of a business. It might even offer access to information that could be of strategic importance. In short, the greater a share’s influence and access, the more valuable the investment could be at sale.
Much of the background information you can use as context to better calculate the value of your shares will be included in the articles of association/shareholders agreement. This will fully detail rights and restrictions, so should be seen as a pillar of the valuation process.
How Forensic Accounting Helps with the Calculation of Fair Value of Shares
No matter whether it is being done to enable a business sale/buyout, or to end a shareholder dispute, knowing how to calculate the share value of a private company can be a particularly complicated and involved process.
The last thing anybody wants is for a valuation to be made, and it be grossly under or overvalued, leading to an inflated/under inflated valuation that could cause major issues.
An experienced forensic accountant has all the skills required to accurately and efficiently assess the share value of a private company, while providing clarity and calm throughout the process.
Why Work with Inquesta When Calculating the Value of Shares
Inquesta possesses a world class team of forensic accountants that have all of the skills required to assist with calculating the share value of a private company.
Our specialist team has been carefully and deliberately assembled to provide the best service available, with experts capable of assisting you in all manner of needs; from calculating share value, to forensic insolvency, commercial dispute, and more.
Calculating the fair value of shares in a private company can be a complicated process at times, particularly for those without experience in the matter.
We know and understand all of the subtle complexities and data difficulties that can arise in the process. Decades of experience helping businesses means that we are perfectly placed to provide you an excellent service that can get you the best result.
The Inquesta team will conduct a thorough and detailed investigation, leaving no stone unturned and no document unread, in order to put forward the most accurate valuation possible.
Instructing a forensic accountant with Inquesta guarantees a service that covers all bases for you and is designed from the ground up with our clients in mind.
Contact our team, request a free consultation today, and learn more about what we can do to assist you.
