The problem with no open market for shares in a private company

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Published: 30 May 2022

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A board of directors with complementary skills

When starting in business or offering professional services it is sometimes viewed as a sensible option to start with two or more partners or shareholder/directors whose different talents or experiences are complimentary. This enables the desired specialisations of the partnership or company to be covered adequately and, therefore, make a successful business.

As the business evolves

But, as time moves on, the aspirations or situations of the director/shareholders can change, which may result in one or more of their number wishing to move on to a new company or retire and sell their shares in the company to a new or existing shareholder. A similar situation applies to a partnership.

There is no open market for shares in a private company

However, there's no open market for shares in a private company.

So a share valuation method needs to be agreed in advance of the director becoming a shareholder. If this is not done and written into the shareholder’s agreement at that stage, unlimited amounts of time and money can be spent in arguing the case, in or out of court, to agree a satisfactory result for either party concerned. Also, remember, if you go to court, the judge may not decide in your favour.

Different types of valuation methods are used for different types of private companies in shareholders’ agreements. In summary, they are:-

  1. Trading companies are valued on a multiple of EBITDA (Earnings, before interest, tax, depreciation and amortisation).
  2. Property/Investment Companies are valued on the market value of their assets, less liabilities.
  3. Professional firms are valued at a factor of their gross recurring fees.

There are many variations of the above and a private company share valuer can advise you on the most appropriate share valuation method for you to include in the shareholders’ agreement.

If you are interested in further information on private company share valuations, then contact David Cane on 07749 080 806 or email [email protected]