How are shares in a private company valued?

Why there is no share price to look up

Listed shares trade every day, so their price is public. Shares in a private company, such as a family company, rarely change hands, and when they do the price is private. So a valuer builds the value up from the business itself.

The starting point is the definition of value that applies. For tax purposes that is usually market value: broadly, the price a willing but not anxious buyer would pay a willing but not anxious seller. A shareholders agreement or company constitution may set its own basis or formula for a buy-out between shareholders, and that can change the answer. A valuer reads those documents before choosing a method.

From the business to the shares, in three steps

1. 01Value the businessThe valuer chooses a recognised method that fits what the company does. For a trading business that is often a multiple of normalised, maintainable earnings. For a company that mainly holds investments, or whose profits are low or irregular, net assets may suit better.
2. 02Move from business value to equity valueThe business value is adjusted for what the company owns and owes outside day-to-day trading. Surplus cash and investments are added. Bank debt, tax owing and other liabilities are subtracted. Loans to or from shareholders and related entities are checked too, because they can raise or lower the result.
3. 03Allocate the value to the sharesThe equity value is spread across the shares according to their rights. Where there is more than one class, the terms of issue, the constitution and any shareholders agreement set what each class gets in dividends, votes and on a winding up. The valuer then considers the size of the holding being valued.

Why 25% of the shares is not always worth 25% of the company

A shareholder who controls the company can usually appoint the directors, who decide dividends and whether the business is sold. A minority shareholder usually cannot. In valuation practice, a buyer of a minority parcel may pay less than its pro rata amount for that lack of control and for how hard the shares are to sell. A controlling parcel may be worth more per share.

Whether an adjustment applies, and how large it is, depends on the facts, the purpose and the documents. Some shareholders agreements require a pro rata value with no discount for a minority holding. A good report says which basis was used and why, so the figure can be checked.

When a share valuation is needed, and how to get one

Common reasons for a share valuation include a buy-out between shareholders, a restructure, succession or capital gains tax. Under the 1 July 2027 CGT changes, Australian resident individuals, and trusts with an eligible beneficiary, who hold shares through 30 June 2027 and later sell them are generally treated as having sold and bought them back at market value just before 1 July 2027. A valuation of the shares as at 30 June 2027 is one way to set that figure. An apportioning method, once one is made, may be another, and your tax adviser decides which suits you. A valuation as at 30 June 2027 is prepared after that date, once your records to 30 June 2027 are available. You can book your place now.

Independent Business Valuation values private company shares, from one parcel to every class on issue. Each report is prepared by a suitably qualified business valuer at Valuo and states the definition of value, the method and every adjustment made. We charge one fixed fee of $999 + GST for a full valuation report on one business or ownership interest with annual turnover under $10 million. The fixed fee applies once we confirm the interest, purpose, structure and records fit the fixed-fee scope. Anything outside it is quoted in writing before we start.