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Unlisted share valuation is important for companies and investors alike. In contrast to listed shares, unlisted shares are not traded on stock exchanges and do not have a market price. This makes determining their value more challenging, especially when it comes to decisions like selling shares, buying a company, or figuring out taxes. Since unlisted companies are not visible on public markets, determining the fair value of their shares requires a more careful, methodical process. Appropriate valuation of unlisted shares is essential for making decisions, regardless of whether you plan to sell shares, purchase a business, raise money, or assess tax obligations.

In this blog, we'll look at five common strategies for valuing unlisted shares. Each method takes a unique approach and can produce various outcomes, depending on the company being appraised. That is why, whether you are an investor looking to assess the potential of an unlisted company or a business owner looking to sell equity, understanding which valuation method is best for your scenario is critical to reaching an accurate and fair result.

Top 5 Methods to Value Unlisted Shares

1. Book Value Method

One of the easiest techniques for evaluating unlisted shares is the book value method. It comprises examining the financial records of the organisation to ascertain its equity or net worth. The company's net worth is calculated by deducting all of its liabilities from all of its assets. To find the book value per share, divide this amount by the total number of shares that have been issued.

This plan is straightforward to implement and is based on reliable data from the company's balance sheet. However, it has limitations since it takes into account historical costs, which may not accurately reflect the assets' current market value. For example, the value of intangible assets like a brand or patents may not be properly reflected on the balance sheet. This can result in an undervaluation, especially if the business has a significant number of such assets.

This method is suited for enterprises with significant physical assets, such as manufacturing companies.

2. Recent Transaction Price

The Recent Transaction Price approach, also known as the Market Approach, values unlisted shares based on the company's most recent sale or purchase of shares. If there has been a recent transaction between independent parties, the price might be used to estimate the value of other shares.

This approach is easy to use and gives a market-based perspective on the share value. It does, however, only function in the event of a recent sale. The price may not be a genuine representation of the share value if the previous transaction was between connected parties (such as family members) or if it happened a long time ago.

In private equity transactions, this approach is frequently employed so that investors may assess the worth of their interests by looking at prior transactions.

3. Discounted Cash Flow (DCF)

The Discounted Cash Flow (DCF) method is a more detailed and forward-looking approach. A company's worth is determined by projecting its future cash flows. The plan is to project future profits for the firm and then, using a discount rate, reduce those earnings to their present value. The risk and cost of capital for the company are reflected in the discount rate.

The DCF approach is very adaptable and offers a thorough understanding of the company's worth, accounting for both its potential for future development and profitability. It does, however, mostly rely on forecasts for future performance and the discount rate. This approach is more complicated and error-prone if not used with caution since minor adjustments to these assumptions might result in significant variations in value.

For organisations that have steady growth and profitability, like well-established corporations in solid industries, this approach is perfect.

4. Net Assets Value (NAV) Including Goodwill and Identified Intangibles

A company's worth is determined by deducting its liabilities from its total asset value using the Net Assets Value (NAV) technique. Goodwill, patents, and trademarks are examples of intangible assets that are included in the computation of this version of the NAV approach. Goodwill, which frequently reflects a company's reputation or customer connections, is the additional worth that a corporation has above and beyond the total of its tangible assets.

Including goodwill and identified intangibles provides a broader view of the company’s true value, especially for companies that rely on intangible assets for their success. However, valuing these intangible assets can be tricky, and their value might change over time depending on market conditions or business performance.

Businesses in sectors where intangible assets play a significant role in the value of the company, such as technology or pharmaceuticals, may find this strategy very helpful.

5. Net Assets Value (NAV) Excluding Goodwill and Identified Intangibles

Similar to the previous version of the Net Assets Value (NAV) technique, this one does not include intangible assets like goodwill. Rather, it concentrates only on the physical assets of the business, like its buildings, machinery, and stock. Taking out intangibles like goodwill, this method yields a more conservative value assessment for the company.

Businesses with a significant concentration of physical assets, like manufacturing or real estate corporations, are the greatest candidates for this approach. It offers a consistent and trustworthy valuation for these kinds of enterprises, but it may underestimate the worth of firms whose growth is mostly being driven by intangible assets.

Summing It Up

Having a better understanding of the various techniques used to value unlisted shares will enable you to make wiser financial choices. Unlisted share valuation is not a one-size-fits-all procedure. Certain strategies concentrate on assets, while others consider current transactions or earnings in the future. Choosing the approach that best suits the business's needs and the valuation's goal is crucial. You'll be in a better position to negotiate the frequently tricky realm of unlisted share valuations with this understanding!

But, it’s always a good idea to seek expert advice when valuing unlisted shares. An expert will give you situation-specific insights, assist with intricate computations, and guarantee the assessment is trustworthy and precise. You may confidently make well-informed judgements with their assistance, particularly when the stakes are high.