How to Calculate the Share Value of a Business

Determining the true value of shares in a private company can be tricky. Whether you’re preparing to sell or transfer ownership, take on investors or understand what your stake is worth, properly valuing a business’ shares is key.

Yet many owners struggle with private company valuations due to the complex calculations involved across various accounting-based approaches. Public companies’ stock prices are available for everyone to see, meaning it’s more intricate and complex to calculate a private company’s share value.

That’s where the chartered accountants and business valuation experts at Hamlyns can help. In this guide, we’ll break down common methods for valuing a private company’s shares to shed light on this complex process.

Why a Company’s Share Value Matters

Before diving into company valuation approaches, it’s important to understand why properly determining share value in your company matters in the first place.

Share value impacts major decisions including:

• Selling your shares when transferring ownership or exiting the business
• Securing investor funding by demonstrating company value
• Establishing fair value for shareholder buyouts or buybacks
• Facilitating share-based director and employee compensation

Therefore, accurate valuation provides a definitive way to set share prices during key transactions and events. Relying on estimates or guesswork leaves too much room for error and can fail to accurately reflect the price your company is worth.

In due course, we will provide guidance pertaining to buying and selling businesses, using this share calculation advice as a benchmark.

Key Share Valuation Approaches

The ‘fair value’ of shares describes the value attributed to a stock by a willing buyer or seller. It’s purposefully vague compared to standard market value. Calculating fair value does not have a clear basis, instead being determined by specific circumstances surrounding the proposed sale and businesses involved in the transaction.

Independent valuers will likely be consulted at the onset to facilitate arriving at a fair value that suits both buyer and seller. This will often be done in conjunction with assessing a company’s articles of association.

However, working out how to calculate share values often involves an array of intricate methods. That said, if done correctly, they can ease shareholder disputes.

Common valuation approaches include:

• Discounted Cash Flow (DCF) – The DCF model projects future cash flow to formulate value.
  It estimates the probable future returns on investments, considering the time value of money (i.e. the amount a share is worth today versus what it could be worth in the future). The idea is that shares could theoretically improve in value if invested correctly.
  However, when using the DCF method, it is assumption-heavy, which can’t always be reliable in a market prone to fluctuation.
• Comparable Company Analysis (CCA) – The CCA model involves using metrics and performance of similar-stature businesses in the same industry to arrive at logical conclusions about their value.
  Forensic accountants will usually be consulted by representatives or shareholders, who will then collate details of relevant businesses and analyse statistics for each of them to compile a detailed valuation ratio. This can be useful in determining whether a business is over- or under-valued.

Each method involves leveraging vital accounting information from a company’s financial statements and records. Without accurate accounts and number-crunching, the outputs risk misrepresenting actual share value.

Why Accounting Matters for Share Valuations

Speaking of financial statements, proper accounting lies at the crux of credible share valuations. Yet compiling robust accounts that withstand scrutiny presents one main hurdle for owners.

Common issues that distort share value calculations include:

• Incomplete or inconsistent records
• Outdated accounting methods
• Omitted niche tax liabilities

Such problems undermine valuation inputs from revenue to assets. But with certified accounting professionals like Hamlyns guiding your process, you benefit from accurate financial statements, precision forecasting, benchmarking and the mitigation of niche liabilities and risks.

In essence, reliable inputs drive reliable share valuations. By leveraging Hamlyns’ expertise around accounting, compliance, and business growth, you set up share value calculations for success.

Hamlyns – Your Valuation & Accounting Partners

With decades of combined experience across accounting, business sales, due diligence, and tax compliance, we can be an invaluable partner for accurately valuing your firm.

Whether you’re selling your company outright, bringing on investors or simply transferring shares, reliable valuations pave the way for smooth transactions and fair deals for all stakeholders. Get in touch today to leverage our expertise and market knowledge around valuing your greatest asset.