Private company valuations – my shares are worth what?March 8, 2018
Last month I talked about the “plummeting” of the ASX following the lead of Wall Street. Since then, the All Ordinaries and the ASX 200 indices have recovered somewhat. Life goes on.
On a side note, Alan Kohler wrote a great article about “Evil indexes we could do without” in The Australian recently. Well worth a read, sorry I can’t find the link.
If we dive deeper into the ASX, we can find lots of information about any listed company you own or want to own shares in. Take iSelect Limited:
- Share price $1.16
- Market capitalisation $247 million
- Price/Earnings multiple 18.3x
- Dividend yield 4.8%
Lots of information about this company is available instantly with a few taps and clicks on the computer. These shares are usually easy to sell when you need to (called marketability).
What about a private company?
Information about share price, total company value and profit multiples are not readily available and almost never prepared by private companies.
There may be a market for the company (or business) as a whole, but this is rarely accessed. In my experience, many business owners only identify a market when a potential buyer knocks on their door or they are reacting to an involuntary event causing an exit.
What if you own a handful of shares, called a minority interest, in a private company?
Again, you won’t have any information about share price and returns.
It is very difficult to sell these shares, at least outside the existing shareholder group. There is no stock exchange, no clearing house and no structure to any minority interest sale.
If you are lucky, you might have a shareholder agreement that starts you off, but in my experience, these are rarely adequate in addressing minority interest marketability.
So, do your private company shares have no value?
Value is a function of expected cash flows (returns), growth and risk.
As a shareholder, you still have an expectation of a return, be it a dividend and / or capital appreciation. It may or may not be recorded by the company, but it is there.
The risk may be high that you cannot easily sell (low marketability), but they are not worth zero.
The fluctuations in the ASX listed companies can provide a general perspective for private company valuations. Private company owners should provide transparency to shareholders with a regular valuation process.