How to Calculate the Share Price of a Private Limited Company

Calculating the share price of a private limited company can be challenging due to the lack of a public market for its shares. Unlike public companies, private companies do not have a market-determined share price, so alternative methods are needed to estimate the value. This comprehensive guide will explore several approaches to determining the share price of a private limited company, including valuation methods, financial metrics, and practical steps. We’ll also discuss factors that can impact the share price and how to use various valuation techniques to get a more accurate estimate.

1. Understanding the Basics

The share price of a private limited company represents the value of one share in the company. For private companies, the share price is not publicly traded, so it needs to be estimated using various valuation methods. The primary purpose of calculating the share price is to provide a fair value for the shares for transactions such as buying or selling shares, raising capital, or determining the company’s worth for potential investors.

2. Valuation Methods

2.1 Comparable Company Analysis

One common method for valuing a private limited company is to use comparable company analysis. This involves comparing the private company to similar publicly traded companies. The process includes:

• Identifying Comparable Companies: Find publicly traded companies in the same industry with similar size and market presence.
• Gathering Financial Data: Obtain financial metrics such as earnings before interest, taxes, depreciation, and amortization (EBITDA), revenue, and net income for these comparable companies.
• Applying Valuation Multiples: Use valuation multiples such as price-to-earnings (P/E) ratio, price-to-earnings before interest and taxes (P/E/EBIT) ratio, or price-to-sales (P/S) ratio to estimate the value of the private company’s shares.

Example Table of Comparable Multiples

Company	Market Cap	Revenue	EBITDA	P/E Ratio	P/S Ratio	EV/EBITDA
Public Co. A	$1.5B	$300M	$75M	20x	5x	10x
Public Co. B	$800M	$150M	$40M	25x	4x	12x
Public Co. C	$2B	$500M	$120M	15x	4.5x	9x

Using these multiples, you can estimate the value of the private company’s shares.

2.2 Discounted Cash Flow (DCF) Analysis

Discounted Cash Flow (DCF) analysis involves estimating the present value of a company’s future cash flows. The steps include:

• Projecting Cash Flows: Estimate the company’s future cash flows for a specific period.
• Determining the Discount Rate: Choose an appropriate discount rate, usually the company’s weighted average cost of capital (WACC).
• Calculating the Present Value: Discount the future cash flows to their present value using the discount rate.
• Estimating Terminal Value: Calculate the terminal value to estimate the company’s value beyond the projection period.

Example of DCF Calculation

Year	Projected Cash Flow	Discount Factor	Present Value
1	$10M	0.91	$9.1M
2	$12M	0.83	$9.96M
3	$15M	0.75	$11.25M
Terminal Value	$200M	0.75	$150M

Total Present Value = Sum of Present Values + Terminal Value

2.3 Precedent Transactions Analysis

Precedent transactions analysis involves looking at past transactions involving similar companies. This method includes:

• Identifying Similar Transactions: Find past transactions involving companies similar to the private company.
• Analyzing Transaction Multiples: Review the multiples used in these transactions, such as acquisition price to EBITDA or revenue multiples.
• Applying Multiples: Apply these multiples to the private company’s financial metrics to estimate the share price.

3. Financial Metrics

Several financial metrics can help in determining the share price of a private limited company:

• Earnings Before Interest and Taxes (EBIT): Provides an indication of the company’s operating profitability.
• Revenue: Total income generated from sales, which can be used with revenue multiples.
• Net Income: The company’s profit after all expenses, used in P/E ratio calculations.
• Book Value: The value of the company’s assets minus liabilities, which can serve as a baseline for share valuation.

4. Factors Impacting Share Price

The share price of a private company can be influenced by various factors, including:

• Market Conditions: Economic and market conditions can impact the company’s value.
• Industry Trends: Trends within the industry can affect the company’s performance and valuation.
• Company Performance: Financial performance, growth prospects, and profitability play a significant role in determining the share price.
• Investor Sentiment: Perception of the company by potential investors can impact the estimated share price.

5. Practical Steps to Determine Share Price

5.1 Collect Financial Data

Gather detailed financial statements, including income statements, balance sheets, and cash flow statements.

5.2 Choose Appropriate Valuation Methods

Select the valuation methods that best suit the company’s industry and financial situation.

5.3 Perform Valuation Calculations

Calculate the share price using the selected methods, such as comparable company analysis, DCF, or precedent transactions.

5.4 Consult with Experts

Engage financial advisors or valuation experts to validate your calculations and assumptions.

6. Conclusion

Calculating the share price of a private limited company requires a combination of valuation techniques, financial analysis, and consideration of various factors affecting the company’s value. By employing methods such as comparable company analysis, discounted cash flow analysis, and precedent transactions, you can estimate a fair value for the company’s shares. It is crucial to use accurate financial data and consult with experts to ensure a reliable valuation.