The mysteries of share valuation revealed

There can be many reasons why company owners may wish to obtain an opinion of the current value of their own shareholdings or of the company as a whole. Perhaps an unsolicited approach to purchase the company has been made. A departing employee shareholder may wish or be forced to sell his or her shares. A company buy-back of shares may be under consideration or the company’s Articles of Association may require a “fair” value of minority shares to be made. Or perhaps there is just a general desire “to know what it is worth”. Whatever the reason, the approaches to a current valuation have broadly the same starting point.

The valuer begins by postulating a sale to a fictional purchaser of 100% of its issued share capital at arms’-length in the current market, basing his assessment of its value on the company information which would have been made available to such a purchaser in the public domain and the confidential information which would have been made available to him as part of normal due diligence procedures.

The mechanics of the valuation of the Company as a going concern usually involve the application of a multiple to the earnings, turnover, or net asset value (or, in some cases a combination of these) of the subject company adjusted for such factors as a commercial remuneration package for directors and for any unusual items of income or expenditure.

In general terms, the multiples to be applied to the subject company profits or sales to determine its value are derived from two main sources:

• Publicly-available information on trade sales or other independent data of transactions involving comparable companies. Multiples are derived from the sale price and any published financial data on target companies

• Comparison with quoted companies within the Company’s market sector applying a suitable discount for size. Multiples are derived from market capitalizations and latest published accounts

In determining the appropriate multiples the Valuer will take account, among other things, of the relative performance of the subject company compared to the external evidence found and its future prospects.

The key point is that share valuation is an art and not a science. The quality of the end result depends very much on the knowledge and experience of the valuer.