Once you know the value of your company, how do you then go on and work out the value of an individual shareholder’s slice of the cake in the event that they want to sell their shares?
When there’s 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 of 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.
Shareholding | Discount | Reason |
75-99% |
5% | The shareholder doesn’t have full (100%) control but, nonetheless, can still pass special resolutions without the support of others (75% of the votes are needed to do this). |
51-74% | 15% | The shareholder has overall control but requires the support of others to pass special resolutions. |
26-50% | 25% | The shareholder doesn’t have overall control on his own but (and this is what makes it better than having less than 26%) he is at least in a position to block others from passing special resolutions because the other shareholders combined can only have a maximum of 74%. |
10-25% | 35% | Here, the shareholder can’t, on his own, block a special resolution as the other shareholders combined own at least 75% of the voting shares. |
<10% | 45% | At less than 10% the shareholder may find his shares being acquired compulsorily in a takeover. |
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 Mr. Smith’s shareholding lies in the 51-74% range, we’ll apply a discount of 15% to his 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
Of course, if the company as a whole is being sold, each shareholder will receive their percentage without discounting; the discounting principle only applies if an individual shareholder is looking to value their ‘standalone’ shareholding – for example, because they want to sell their own shares to another party.
