Is it an art or a science?
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Published: 22 Nov 2019
This interesting graffiti art work of Albert Einstein perfectly compliments the question I pose regarding calculating Private Company Share Valuations - Is it an art or is it a science?
First let's consider...
Price and market value
Where commodities and most property are in frequent demand, prices in general are represented by market value. For instance, the price on offer for motor cars or consumer goods is near to the market price.
In a modern economy the price for goods and services is normally fixed. But the price must be within the buyers needs and cost of alternative options. Otherwise the price must fall to support a sufficient volume of sales.
Now let's consider...
Valuation of private company (unquoted) shares
Whenever property is infrequently or rarely traded, the market value concept has little relevance. Most private company(unquoted) shares are a prime example of infrequently traded property. There is no stock market for these shares. In addition, they are closely held and restrictions on their transfer are normally imposed by the Articles of Association (the company rule book).
Therefore, in the valuation of unquoted shares, it is necessary to envisage a specific transaction and to assess the motives on both sides. In short, the valuer must always ask "to whom" and "for what purpose" are the shares to be sold.
For instance, the sale of a 30% minority interest in a private company to an outsider may well be discounted for lack of influence against the other 70% shareholder. However, if those shares are offered to the 70% shareholder, he may be prepared to pay a 'buyer’s premium', since he will be ending up with 100% control of the company's management, assets, and dividend policy.
We may not be any closer to answering the question about whether calculating private company share valuations is an art or a science, but what I do know is that I'll leave art to the artists, science to the scientists and you can leave it to me to determine the valuation of company shares.
If you wish to discuss this further, do give me a call on 07749 080 806 or email David Cane.
