Selling your Company? How to value your shares. Any valuer in the corporate finance area will tell you that valuing a shareholding in a private limited company is not an exact science...

Frequently, no market exists for the purchase of shareholdings in a private limited company save amongst existing shareholders.  In particular, most well drafted shareholders agreements will require a shareholder to offer his/her shares to their co-shareholders for sale as the first step.  

In such circumstances the remaining shareholders will very often have a good idea what the shares are worth as they may be involved in the day to day running of the business and/or be familiar with valuations of businesses in the relevant industry/sector. Notwithstanding the foregoing a valuation of a shareholding in a private company would be required for advisory and taxation purposes in such situations.

There is wide scope for significant variations in values when seeking a formal valuation and the first question a valuer usually asks is what the purpose of the valuation?  The objective and for whom the valuer is acting will determine whether s/he seeks to minimise or maximise the valuation and usually in the knowledge that it is the first stage in a negotiation.

A very brief overview of the four most commonly used methods when valuing shares in a small to medium company is set out below.

1. Capitalisation of Future Maintainable Earnings

First of all a valuation is an estimate of the current capitalised (ie lump sum) value of the right to receive a company’s future annual earnings over a period of time.  Under this methodology future maintainable pre-tax earnings (“FME”) are multiplied by a price earnings ratio multiplier (“a PE multiplier”) in order to establish a fair market value for the business. Usually FME, assuming they can be identified, are calculated on an Earnings Before Interest Tax and Depreciation (or EBITDA) basis.

The advantage of using a multiplier method is that it is widely accepted and understood.  However the question frequently remains whether such FMEs can be maintained and for how long particularly where there is reliance on a small number of customers. Also, the figure to use – which is influenced by many factors including the business sector, size of the company and of the economic climate- as the multiplier often forms part of debate. There are a number of possible indices ranging from quoted FTSE indices to others such as the BDO PCPI – the scope for significant variations in the resulting valuations is obvious.

2. Net Tangible Assets on a going concern basis

The net assets basis is “what it says on the tin” ie that the value of the company is the sum of the value of its assets less its liabilities. Complications can arise when there are non-business assets in the accounts such as surplus cash or investment properties but even then the fundamental principle holds true.  However this method does not take into account the value of ‘goodwill’.  Where the earnings basis described above yields a higher result than the NTA method, the earnings method is considered more appropriate.  The difference in value between the earnings method and the NTA method is by definition “goodwill”.

3. Discounted Cash Flow

This process involves discounting the sum of future cash flows, called the net present value (NPV) to take into account the current benefit of future dividends, retained profits and the proceeds of any future sale of the business which would lead to a figure representing the current time value of the cash. A discount rate of 8% would mean that in each successive year the same amount of money would be worth 8% less than the previous year. A valuer must choose a discount rate and there are many different ways in which to do so.

The DCF method is used to value 100% interests in a company as it is based on the premise of having 100% control over future cash flows.

The benefit of the DCF method is that it focuses on cash flows (which take financial commitments into account) rather than profits alone.  However a major difficulty experienced with DCF concerns the reliability of the underlying information.   In addition, there are no firm guidelines as to an appropriate rate of discount which means the formula can be misapplied. 

The DCF method is perhaps more suited to assess the viability of long term costly capital projects as opposed to a method of valuation of small, family run or ‘lifestyle’ company.

4. Industry Rules of Thumb

Industry Rules of Thumb are, as the title suggests, generally accepted formulae for valuing businesses in a particular sector.  For example, one rule of thumb stipulates that boutique retail merchants are worth 50% of most recent year’s net income plus inventory at cost plus equipment at fair market value (Des Peelo, The Valuation of Business and Shares, 2nd Ed).

Valuations based on rules of thumb are however inherently flawed and should be used with caution, if at all, and only along with other valuation methods described above.


Frequently valuations of shareholdings in private companies are required in the context of shareholder disputes or the transfer of business on sale or succession and are used as guidelines to form the backdrop of negotiations on sales price between two willing parties (or sets of parties). 

If you are a shareholder of a private limited company you should review carefully the arrangements for the sale and valuation of your shares and ensure that they are set out clearly in a well-drafted shareholders’ agreement.  An experienced solicitor in commercial law would assist you with drafting a shareholders’ agreement and potentially avoiding a costly dispute at a later stage.

If you would like further information about any of the above, please contact Deirdre Farrell by email on, or telephone:  01 213 59 40 or your usual contact at Amorys.

© January 2018
The content of this article is for information purposes only and does not purport or intend to constitute legal advice.  Amorys Solicitors is a boutique commercial and private client law firm in Sandyford, Dublin 18, Ireland.