How to Value Shares In a Private Company

How Your Purpose Dictates the Final Value of Shares

Calculating a defensible value for shares in a private company requires a structured, eight-step process.

The framework moves from defining your purpose and selecting the right valuation method to applying relevant discounts and triangulating a final figure. This is critical because the same private limited company can be worth five different amounts depending on who is asking and why.

An EMI share scheme valuation agreed with HMRC might value each share at £2, while an acquirer might pay £25 per share. Neither figure is wrong. The purpose of the business valuation dictates the methodology, the inputs, and the final number.

Valuing a private business is fundamentally harder than valuing a public one for five reasons:

• No observable market price: Unlike a public company’s stock price, no stock exchange provides a consistent share price.
• Illiquidity: Shareholders cannot sell shares quickly, as the articles of association often restrict transfers.
• Information asymmetry: Valuing private companies is not straight forward because they file limited public accounts, providing far less financial data than public companies.
• Audit exemptions: Many small private companies are exempt from audit, making their financial statements less reliable.
• Subjectivity: Qualified experts may reach different conclusions from the same data, as valuation involves professional judgment.

Understanding which valuation method applies to your situation is the central challenge when you value shares in a private company.

The 8-Step Framework for a Defensible Private Company Valuation

These valuation methods fit into a structured, eight-step valuation process.

The framework moves from initial scoping and calculating an Enterprise Value to adjusting for debt and applying relevant discounts to arrive at a final, defensible Equity Value per share.

Step 1: Define Your Purpose, Scope, and Valuation Date First

Determine exactly why you need the valuation (e.g., EMI scheme, M&A, shareholder dispute). Check the articles of association for any prescribed valuation formula.

Step 2: Gather Three Years of Financials, Forecasts, and Your Cap Table

Collect at least three years of financial statements, current management accounts, forecasts, your cap table, shareholder agreements, and key contracts.

Step 3: Select and Apply the Appropriate Valuation Method

Normalise historical earnings and assess your company’s characteristics to choose the right valuation method. Research comparable multiples from authoritative sources like MarktoMarket or Dealsuite to inform your calculations. The appropriate choice depends on your company’s stage, its profitability, and the purpose of the valuation.

Option 1: Use Normalised EBITDA Multiples for M&A and Sale

To calculate the value of your business, you first need an accurate, adjusted EBITDA figure.

Start with the reported profit before tax.

Add back Interest, Tax, Depreciation, and Amortisation (EBITDA).

Normalise the result. Adjust for one-off costs, replace director salaries with market-rate equivalents, and remove any personal expenses run through the business.

While the sector dictates the range for a valuation multiple, company size has the biggest impact. Larger, more established companies are less risky and command higher multiples. Dealsuite data shows UK companies with £200k EBITDA average just 3.8x, while those with EBITDA over £5m average 7.1x.

Option 2: Use P/E Multiples of 4x-10x for HMRC-Approved EMI Scheme Valuations

When you need a share valuation for tax purposes, such as setting up an Enterprise Management Incentive (EMI) scheme, HMRC prefers an earnings-based valuation method. This valuation method multiplies the company’s normalised earnings by a price/earnings (P/E) multiple.

You must first normalise your net profit after tax. Adjust for any non-recurring income or expenses and ensure all director remuneration and related-party transactions reflect fair market value.

For small UK private companies, typical P/E multiples range from 4x to 10x. A stable business with recurring revenue will achieve a higher multiple than a volatile one with project-based work.

For an EMI valuation, you must calculate two figures and obtain pre-clearance from HMRC’s Shares and Assets Valuation (SAV) team by submitting form VAL231: Unrestricted Market Value (UMV) and Actual Market Value (AMV). The company uses the AMV, which reflects all restrictions in the company’s articles, to set the option exercise price.

Option 3: Use the VC Method for Pre-Revenue Startups

For pre-revenue or early-stage startups seeking investment, traditional valuation methods don’t work. Instead, the Venture Capital (VC) method works backwards from a projected future exit. First, project the company’s revenue or EBITDA in a typical exit year (usually 5-7 years out) and apply a relevant industry multiple to estimate its terminal value.

Next, calculate the post-money valuation needed today to deliver the investor’s target return on investment (IRR). Finally, subtract the new investment amount from the post-money valuation to get the pre-money valuation.

The required return, or discount rate, reflects the high risk of investing in startups and decreases as the company matures. Seed-stage companies require a 50% to 100%+ IRR, while Series C companies might require only 25% to 35%.

Option 4: Use Alternative Methods for Specific Contexts

While the three primary methods cover most scenarios, you can use four others in specific contexts.

• Revenue Multiples for Pre-Profit Growth Companies: When a company has revenue but no profit (common for SaaS businesses), use a multiple of Annual Recurring Revenue (ARR). UK SaaS companies typically trade at 4x to 8x ARR.
• Discounted Cash Flow (DCF) for Companies with Reliable Forecasts: DCF projects future cash flows and discounts them to their present value. It is theoretically pure but highly sensitive to assumptions, making it best for mature companies with predictable performance.
• Asset-Based Valuation as a “Floor Value”: An asset-based valuation calculates value as total assets minus liabilities. It is most appropriate for asset-heavy businesses, such as property or manufacturing companies, and provides a minimum “floor value,” but it ignores intangible assets.
• Comparable and Precedent Analysis: This analysis examines valuation multiples of similar public companies or the prices paid in recent M&A deals in your sector. The resulting data provides useful benchmarks, but you must adjust it for differences in size, growth, and control.

Step 4: Adjust for Net Debt and Cash to Find Equity Value

The valuation methods in Step 3 typically calculate the Enterprise Value (EV), which represents the value of the business’s entire operations. To find the Equity Value, which is what remains for shareholders, you must adjust the balance sheet for cash and debt.

Use the formula: Equity Value = Enterprise Value + Cash − Total Debt. Cash increases the price paid to shareholders, while debt reduces it.

Step 5: Apply Discounts for Minority Stakes or Premiums for Control

For a minority shareholding, apply discounts for lack of control and marketability. Buyers pay a premium, typically 20% to 40%, for a controlling stake that gives power over the company’s strategy. Minority interests lack this power and are worth less per share, requiring a corresponding discount. A 30% control premium implies a corresponding minority discount of around 23%.

The illiquidity of private company shares also requires a separate Discount for Lack of Marketability (DLOM) of 25% to 35%. In tax valuations for early-stage startups, these combined discounts can reach 60% to 90%.

Step 6: Triangulate Results from Multiple Methods to Reach a Final Value

If you used multiple methods, weigh the results based on the quality of data and relevance to your purpose. Triangulate the different values to arrive at a single, defensible conclusion.

Step 7: Document Your Methodology, Assumptions, and Data Sources

Prepare a comprehensive report that clearly explains the purpose, methods, assumptions, data sources, and calculations. A well-documented report is crucial for defending your valuation to HMRC or in court.

Step 8: Submit Your Report to HMRC or Other Stakeholders

For specific purposes, such as an EMI scheme valuation, submit your report and form VAL231 to HMRC’s SAV team for pre-clearance. For other scenarios, present the report to buyers, investors, or other shareholders.