Valuing Shares

In a Private Limited Company it is very difficult to ascertain an accurate valuation of the company. Accountants will arrive at different valuations and provide good justification for that!

There are basically two main ways to value a company:

1. “Net Asset” approach, this focuses on the value of the assets presently owned by the company for example property, plant, machinery etc.

2. “Earnings” based approach, this concentrates on the income and earnings generated by the company both past, present and future.

Although normally the valuer, more often than not an accountant, will decide which approach to take depending on the business in question, certain companies may favour a net asset based valuation (e.g. companies with large property portfolios or significant plant and machinery) whereas some will prefer earning based valuations (e.g. IT support companies, Internet retailers, resellers of software, who have lower assets in comparison to their earnings). In most cases they will be directed by the company’s articles of association to decide upon a “fair value” of the company.

If the parties cannot agree to an accountant then they need to ask the President for the time being of the Institute of Chartered Accountants in England and Wales to independently identify a suitable person and the parties must agree, except in the case of manifest error, to be bound by the accountant’s decision.

In practice, where a minority shareholder is forced to sell their shareholding, then we would argue that it is inappropriate to apply a discount. In contrast where a minority shareholder wants to sell his shares voluntarily, then a suitable discount would be given to reflect their minority standing and also the lack of marketability of the shares generally. This is because traditionally, the amount paid to a minority shareholder in a voluntary sale of shares warrants a lower price as it reflects their standing in the company, and would not allow the new owner of the shares to have control of the company.

The date and timing of certain events upon which a company is to be valued is very important. Usually the parties come to an agreement as to the date and proposed expenditure of the company but if they do not then the date that each party proposes could impact the valuation differently. If one party deliberately does something to adversely affect the valuation then ultimately the court will decide on what is right and wrong and the court can discount the adverse effect.

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