There are times where the shareholders may decide to sell off their shares of the company. There may be an acquisition made on a company or the shareholders of the company may decide to cash out of their investment in a company. If the shares of the company are listed on a stock exchange, the value of the shares can more or less be ascertained just by looking at the market. However, for private companies where the shares are not openly traded, the value of these shares is difficult to determine. There are, however, some methods we can use to value shares of privately-owned companies.
1) Use the Net Assets method
This method takes the total value of what the company owns, i.e. all cash holdings, equipment and inventory and subtracts any debts or liabilities. This is the value of the company’s balance sheet. This method is the usual starting point to determining what a company is worth. However, a company is most probably worth more than its net assets. This method does not take into account future earnings and intangibles like the value of the brand (i.e. goodwill)
2) Use the multiple of sales revenue method
To use this, one will need to determine through business brokers how much a company in the same industry would be worth for that particular amount of sales. For example, a construction company may typically be valued at 2.5 times of annual sales
3) Use the price to earnings multiples method
One of the popular methods of valuing a company would be to use the price-to-earnings (P/E) ratio. Using the current year’s earnings or a reasonable estimate of the company’s earnings in the next year, one would then apply the typical P/E ratio to reach the value of the company. For example, if the earnings are $150,000 and the typical P/E ratio is 10, then the company’s value would be $1,500,000.
4) Use the discounted cash flow analysis method
This method looks at a company’s annual cash flow and projects the future cash flow. We then apply a net present value calculation to the value of that future cash flow to calculate the value of the company.
5) Using the negotiation and “willing buyer, willing seller” method
This method removes the emphasis on figures and formulas. A large portion of the value of the company may be in the brand. For example, if we were to use the Net Assets method to value Coca Cola, we would be negating the value of the Coca Cola brand itself. Thus the value of Coca Cola is so much higher than the valuation reached in all the above methods. The company may be very established in the industry, have a deep web and social media presence. Thus the actual price that buyers might be willing to pay for the company might be a lot higher or even perhaps lower than the numbers that are crunched out through the formulas above.
If you need assistance with matters relating to valuing or selling your company, you may contact us at [email protected].
When in doubt, seek legal advice or consult an experienced ACRA Filing Agent.
The editorial team at Singapore Secretary Services
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