How are shares in a private company valued?

Value the business before you value the shares

A share is a claim on a company, so the first task is to understand what the company owns and earns. Most private company valuations begin by assessing the operating business on a maintainable earnings, cash flow or asset basis, depending on what the business does and the quality of its records. That produces a value for the enterprise as a whole, before any allocation between lenders and owners.

Only after that step does the analysis turn to the shares. Skipping straight to a price per share, or dividing a headline business value by the number of shares on issue, misses the adjustments and rights that determine what a shareholder actually holds. Our guide on how business valuations work covers the first step; this guide covers what follows.

The bridge from business value to equity value

Enterprise value describes the operations. Equity value is what remains for shareholders after interest-bearing debt is deducted, surplus cash and non-operating assets are added, and other claims on the company are taken into account. Shareholder loans, unpaid tax, deferred consideration from an earlier acquisition and lease obligations can all sit in the bridge.

Each item should be listed with its amount at the valuation date and a short explanation of why it belongs there. A reader should be able to move from the enterprise figure to the equity figure line by line. The enterprise value versus equity value guide works through the arithmetic in more detail.

Share classes and the rights attached to them

Many private companies have more than one class of share. A class may carry a preferential dividend, a fixed redemption amount, priority on a winding up, extra votes or no votes at all. Discretionary dividend classes, common in family companies, may have received all of the distributions for years while carrying no other rights.

The value of the company's equity must be allocated between the classes according to those rights, not simply by counting shares. A class that ranks ahead of the ordinary shares absorbs value before the ordinary shares receive anything. The report should identify every class on issue from the member register and explain the allocation.

The constitution and shareholder agreement set the rules

The constitution and any shareholder agreement govern how shares can be transferred, who has first right to buy them, how a price is to be set on exit and what happens on death, disability or default. Some agreements prescribe a formula or define the basis of value in their own terms. Others require an independent valuer and say nothing about the basis, leaving market value as the natural default.

Read those documents before the valuation starts and send the valuer the current signed versions, including amendments. Where the wording is ambiguous or the parties disagree about what it means, ask your lawyer to resolve the question first. A valuation that silently adopts one reading of a disputed clause invites a challenge later.

Control, marketability and dividend history for a parcel

A parcel of shares is worth what a buyer of that parcel would pay, which is not always its arithmetic share of the whole. A holding that cannot appoint directors, set dividend policy, approve a sale or block a related-party arrangement offers its owner less than a controlling stake does. Restrictions on transfer, pre-emptive rights and the absence of any market for private shares also affect what a buyer would pay.

None of this produces an automatic discount. The size of any adjustment depends on the specific rights, the pattern of dividends actually paid, whether the other shareholders act together, and the basis of value the purpose requires. Some agreements expressly exclude discounts, and some purposes call for a proportionate value. The minority shareholding guide explains why the percentage is only the starting point.

A hypothetical example: 30% of the shares is not 30% of the whole

This example is hypothetical and simplified. The multiple and the discount are assumed for the illustration only and are not benchmarks or recommendations for any real company.

The 20% adjustment is not a rule. It is a placeholder that stands in for a reasoned assessment of the rights, restrictions and dividend record of the actual parcel. Under a shareholder agreement that requires a proportionate value, the answer would remain $300,000, and a controlling 70% parcel might be assessed on quite different reasoning.

What to prepare before a share valuation

Gather the constitution, the shareholder agreement with all amendments, the current member register, at least three years of financial statements, the latest management accounts, a schedule of shareholder loans and dividends paid, and any offers or transfers in recent years. Note the valuation date and the purpose, and identify who will rely on the report.

If a clause governs the exit, send its exact wording. If the shareholders are not in agreement, say so at the outset so the engagement can be structured as a joint or one-sided instruction. The shareholder exit valuation service starts with a free conversation about what the matter needs, and standard signed reports start from $1,495 + GST for suitable, straightforward matters.

General educational information. Examples are hypothetical and do not value a real business. The appropriate treatment depends on the purpose, evidence and agreed scope.