How to value a small privately owned ltd company?
March 52010
Hi,
Just wondering how you would value a company if we were to create shares within the business.
This case would not be for sale, but a valuation to distribute share to employees and appropriate the correct current valuation of these shares and also appropriate any tax associated.
We have very few assets – maybe £2k worth
Turnover is fairly good (250k) and profit is about (75k)
I have looked on the web and it’s very confusing, just want some pointers.
Hi, Just to clarify, this is a UK based company… 
Companies with employee share ownership tend to do better than those that don’t, so distributing shares to employees is a sound idea. You will end up with fewer, but more valuable shares. As a rule of thumb, shares valued at 5% -10% of an employee’s after tax pay are considered to be a suitable incentive.
While you can use Price/Earnings and Price/Revenue multipliers of similar public companies as a guide, the multipliers for your company will be different because the risk profile of a small company is different. Your company’s multipliers will be at the low end of the scale.
Any distribution of stock is in effect a sale of the company. The shares will have no value to the employees and may even cause dissatisfaction if your company does not provide a mechanism for the employees to sell their shares. If you don’t want outsiders involved, make a rule that employees can sell only to one another or to the company. This means that the company valuation will need to be done at least once per year in a manner that is seen as fair to all involved. An independent appraiser will be needed and this will be an added cost.
There are legal issues with employee stock plans. Be aware that more stringent regulations take effect as the number of shareholders grows. At minimum, your company with have increased reporting requirements and increased accounting costs. If your company ever becomes public, the regulators will need to be satisfied that all grants of shares were within 10% of fair market value at the time of the grant.
As an alternative to distributing shares, consider allocating a part of the company’s profit to a profit sharing program. That way you hold all the shares, get a lot of the benefit and avoid most of the costs.
March 5th, 2010 at 8:48 pm
Easiest thing to do is to look at publicly-traded companies in the same industry. Apply their price/earnings ratio to your profit, and that gives you a value for your company. Be sure to calculate profit *after* a reasonable salary is paid for all management services provided by the owners, and *before* any special perks are deducted, like season tickets to the local NFL team or donations to the owners’ church.
There are often formulae for specific industries. For instance, newspapers companies value is based on the number of subscribers, and the amount subscribers pay for the newspaper, despite the fact that advertising revenues are about 80% of a newspaper’s income. A tax preparation business generally has a value equal to a year’s gross sales. An ISP or a cable company is typically valued at $X per subscriber, no matter how much or how little the subscribers pay, no matter how much or how little the physical plant is worth.
But for most businesses, the P/E ratio works pretty good as a rule of thumb.
References :
March 5th, 2010 at 9:14 pm
Companies with employee share ownership tend to do better than those that don’t, so distributing shares to employees is a sound idea. You will end up with fewer, but more valuable shares. As a rule of thumb, shares valued at 5% -10% of an employee’s after tax pay are considered to be a suitable incentive.
While you can use Price/Earnings and Price/Revenue multipliers of similar public companies as a guide, the multipliers for your company will be different because the risk profile of a small company is different. Your company’s multipliers will be at the low end of the scale.
Any distribution of stock is in effect a sale of the company. The shares will have no value to the employees and may even cause dissatisfaction if your company does not provide a mechanism for the employees to sell their shares. If you don’t want outsiders involved, make a rule that employees can sell only to one another or to the company. This means that the company valuation will need to be done at least once per year in a manner that is seen as fair to all involved. An independent appraiser will be needed and this will be an added cost.
There are legal issues with employee stock plans. Be aware that more stringent regulations take effect as the number of shareholders grows. At minimum, your company with have increased reporting requirements and increased accounting costs. If your company ever becomes public, the regulators will need to be satisfied that all grants of shares were within 10% of fair market value at the time of the grant.
As an alternative to distributing shares, consider allocating a part of the company’s profit to a profit sharing program. That way you hold all the shares, get a lot of the benefit and avoid most of the costs.
References :
1. The Stock Options Book http://www.nceo.org/
2. My company is dealing with the same issue.