Valuation Of Equity Shares for private limited Companies?
Importantant Point to be considered while valuing share of private limited companies:-
1. Valuation of private equity share is generally subject to private understanding between parties
2. In valuation of pvt. Co. Equity share, any provision related to Valuation or transfer of shares as per AOA (Article of Association) must be followed.
3. In absence of any any provision in AOA, permission from other members should be obtained, and shares should be first offered to them for allotment.
4. While calculating Value of equity shares of private company generally Net asset value method or profit earning capacity method is followed.
A. Net Asset Value (NAV) Method:- Under NAV all assets are taken at book value(excluding fictitious assets and goodwill) and reduced by Net liability, then value derived is divided by number of shares to get market Value per share.
B. Earning Capacity Method:- Under this method average of past few years profit is taken and adjustment is made for any abnormal transactions occurred in those years, and then considering future growth prospect Future Maintainable Profit (FMP) is arrived.
FMP(future maintainable profit) arrived is divided by Number of shares to get Earning Per Share (EPS) .
Then EPS is multiplied with P/E Ratio (market price to earnings ratio). In absence of Market price of share to get P/E ratio Use method 100/NRR(Normal rate of return).
On multiplication of EPS with P/E ratio we get value of market value per share.
NOTE:- To avoid Conflict between high and low market price at different method its advisable to take average of above two methods, which is as follows :
= Market Price with NPV + Market Price With Earning Capacity