Once you know the value of your company, how do you then go on and work out the value of individual shareholders’ slice of the cake?
When there is more than one shareholder, you can’t simply take the overall value of the company and multiply it by that person’s percentage shareholding to arrive at a valuation of their shares. This is because any shareholding less than 100% needs to be discounted.
The following provides a useful framework, with reasons, for applying discounts depending on how many shares an individual owns.
Let’s take a simple example. Mr. Smith own 70% of a company and Mr. Brown owns the other 30%. The company has been valued at £1m. As his shareholding lies in the 51-74% range, we’ll apply a discount of 15% to Mr. Smith’s holding. Mr. Brown will have a discount of 25% applied to his, because his shareholding lies in the range 26-50%. So their individual holdings are valued as follows:
Mr. Smith: £1m x 70% = £700k minus 15% = £595k
Mr. Brown: £1m x 30% = £300k minus 25% = £225k
