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Share Valuations

Valuing shares in a private limited company is a very subjective exercise and there are a number of different methods that may be applied.

In many cases, it is most appropriate to adopt a valuation based on the earning ability of the company. The valuer will normally seek to arrive at a maintainable earnings before interest, tax, depreciation and amortisation (“EBITDA”) as the starting point.  It is often necessary to then adjust the actual accounting entries to take account of any non-arms length transactions or significant one off transactions.  A common example of a non-arms length transaction that will require an adjustment are transactions with shareholding directors, for example if a shareholding director does not take a salary choosing instead to take dividends or merely leave funds within the business.

Having arrived at a hypothetical maintainable EBITDA an appropriate multiplier will be applied to arrive at an enterprise value for the company’s business. This multiplier will depend upon the company’s profile and other factors.

There are alternative bases that can be used to value a company including the net asset value of the company or a dividend yield basis of valuation.

Other factors to take into accounts when valuing a company or shareholding is the ‘free cash’ in the company and the level of shareholding being valued.

If you require help with the valuation of a company or a specific shareholding, please contact us.

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