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 to value the shares of a private company? ›
The most common way to estimate the value of a private company is to use comparable company analysis (CCA). This approach involves searching for publicly-traded companies that most closely resemble the private or target firm.
How do I calculate the value of my shares in a company? ›
A company's book value is equal to its assets minus its liabilities (asset and liability numbers are found on companies' balance sheets). A company's book value per share is simply equal to the company's book value divided by the number of outstanding shares.
How do I find out how much 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 to value a privately held company? ›
A common way to value a private company is by using the Discounted Cash Flow (DCF) or a Comparable Company Analysis (CCA), and by taking into account factors such as financial performance, growth prospects, industry dynamics, and risk factors.
What is the fair value of a private share? ›
In private companies, the Fair Market Value (FMV) is the accepted current value of one share of a private company's common stock. Fair Market Value is determined by independent third party appraisers. It represents what the stock would be worth on the open market.
Who can do valuation of shares of a private limited company? ›
Only a Merchant banker registered with Sebi can issue the valuation report.
How do I sell shares in a private company? ›
How to Sell Privately Held Stocks
- Sell the shares back to the company. The easiest way to sell shares of privately held stock is to get the company that issued them to buy them back. ...
- Sell the shares to another investor. ...
- Sell the shares on a private-securities market. ...
- Get your company to do an IPO.
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 without a broker? ›
Usually you need to open an account with a broker to buy and sell stocks online. Some publicly traded companies, however, do offer a direct stock purchase plan (DSPP), where you can buy shares directly. Instead of using a broker, the company's transfer agent manages the transaction.
While there is no limit on the number of shares a company can have, there is a limit on the number of shareholders a private company can have. A private company should not have more than 50 shareholders.
What is the formula for valuation of a company? ›
Company valuation = Debt + Equity – Cash
Since the enterprise value method considers every source of capital, investors can rely on this valuation to neutralise market risks. However, using the enterprise value method to determine the company worth for high-debt industries can lead to incorrect conclusions.
How do you value a company with no profits? ›
One of the simplest methods to value a business with no profits is to look at its assets. This means adding up the value of all the tangible and intangible assets that the business owns, such as property, equipment, inventory, patents, trademarks, and goodwill.
What is the discount rate for a private company valuation? ›
Illiquidity Discount: Private companies are less liquid – i.e. there is less marketability, and buyers to sell shares too – and should thus their valuation should reflect an illiquidity discount, a reduction in value that typically ranges between ~10% to 30%.
How many times is EBITDA a company worth? ›
The multiples vary by industry and could be in the range of three to six times EBITDA for a small to medium sized business, depending on market conditions. Many other factors can influence which multiple is used, including goodwill, intellectual property and the company's location.
Can a private company have an equity value? ›
The valuation of the equity of private companies is a major field of application for equity valuation. Private companies are those whose shares are not listed on public markets. Generalist investment practitioners need to be familiar with issues associated with valuations of such companies.
What is the market capitalization of a private company? ›
Market capitalization shows how much a company is worth as determined by the total market value of all outstanding shares. To calculate a company's market cap, multiply the number of outstanding shares by the current market value of one share.
