One of the most sensitive issues in a private company transfer is the valuation of the business. We also find this to be one of the most confusing issues for business owners.
Most owners have a point of view that there is one value for their company. That thinking is similar to the concept of one value for the shares of, say, IBM if you wished to trade them at a certain moment in the trading day. However, there are many complexities involved with valuing private company stock, not the least of which is that it is not freely tradable on a public exchange for cash. Another factor that significantly affects how private stock is valued is they buyer’s cost of capital.
These and many other issues make private companies unique and allow us to conclude the following: There is no one value for the stock of a private company.
The value depends on the subject interest and the parties involved in the transaction. For example, if the buyer of the stock is a large company with cash available for acquisitions and, therefore, a low cost of capital, they may pay more for the stock than a buyer who is a partner in the business and has no capital to bring to the table. The larger buyer may also be willing to pay more for a 100% interest in the company than another buyer would be willing to pay for a minority interest.
Different attributes of buyers and sellers cause them to have different points of view and motivations. As a result, valuations of private company stock will be different depending on the facts and circumstances of each case.
Have you gone through the valuation process for your private company? What was your experience? Share in the comments.