It is usual for some form of valuation exercise to be carried out when a company is issuing new shares or when the company itself is being sold. The valuation will seek to determine the current worth of the shares.
In the case of public quoted companies, the valuation exercise has a defined starting point. A market place already exists in which the company's shares are traded regularly on a recognised exchange, for example, the London Stock Exchange. The share price of the company would provide a reasonable starting point for valuing additional shares to be issued by the company or for the business itself.
In smaller companies with few assets and insubstantial trade, the value placed on each share may be its nominal value.
In business entities where there are plentiful assets (some of which may be intangible), more complex and substantive work will be required. Accountants may be brought in to provide an up to date valuation and produce a report outlining their assumptions, methodology and conclusions.
For trading limited companies there are different valuation models which are sometimes employed to find the value of a company or its shares.
The different valuation models are:
- Net asset values
- Discounted earnings
- Scrap or break up value
- Replacement cost
- Multiples of turnover
In practice, these valuation methods will be used to find a minimum and maximum value. The parties then negotiate, weighing up different factors to arrive at an appropriate final figure.
