Private Company Share Valuation

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Published: 16 Oct 2014

How do buyer and seller reach agreement?

There is a ready market for shares quoted on the London Stock Exchange. Therefore the share price on any one day is easy to determine in normal conditions.

Generally speaking, there is no market between existing shareholders in a private company, since the shares are held on a long-term basis between a few shareholders. Also, such shareholdings may be linked with directorships or employment. Furthermore, the Articles of Association (the company rule book) often restricts the transfer of shares to existing shareholders or family members.

To overcome this lack of a market in private company shares, the Articles of Association usually offer an escape route in the form of an independent valuation of the shareholding to be sold at a Fair Value. This is particularly pertinent where both parties are existing shareholders.

This term is frequently included in the share transfer provisions of private companies’ articles of association or shareholder’s agreement, which requires the company’s auditors or nominated expert valuer to determine the value of the shares to be transferred. Dissatisfied shareholders may resort to arbitration or the courts.

The valuer must judge what is fair and, provided the valuer’s judgement is arrived at honestly and not negligently, it should stand.

The following five factors form the basis of judgement of Fair Value:

  1. Fair value is distinct from market value, which is the more generally recognised value concept. Market Value takes into account what the buyer is prepared to pay and what the seller is prepared to accept as a sale price.
  2. The Fair Value concept is the desire to be equitable to both parties. 
  3. It recognises that the transaction is not in the open market.
  4. The buyer and seller have been brought together by the operation of a legally binding agreement (e.g. Articles of Association with pre-emption rights for existing shareholders ), foregoing the normal bargaining and negotiating procedures between them.
  5. The fair value must take into account as a minimum requirement what the seller gives up in value and what the buyer acquires in value through the transaction.

So if you are reaching deadlock in negotiations in buying or selling your shares, David Cane of Sundial Tax & Finance Ltd can offer a professional valuation service to provide a basis of Fair Value on which both parties can reach agreement. 

If you would like to know how to achieve maximum results from the sale of your company, you are invited to have a free consultation with David Cane of Sundial Tax & Finance Ltd.  Call to arrange an appointment (T) 0845 177 0036; (M) 07749 080 806 or email [email protected]