Two steps, not one
Most of the guidance that answers this question — much of it written for a US audience — explains how to value the business and stops there. For Australian purposes that is half the job. Valuing shares is a two-step exercise: first establish what the business itself is worth (the enterprise value), then bridge from that figure to the value of the equity, and finally to the value of the specific parcel being valued. The standard throughout is market value — the price a willing but not anxious buyer would pay a willing but not anxious seller, the principle from Spencer v Commonwealth (1907) that still anchors IVS 104, APES 225 practice and the ATO's market valuation for tax purposes guidance. The second step is where informal valuations most often go wrong, because a shareholding is not simply a percentage slice of the headline number.
Step one: value the enterprise
The enterprise value is established using the accepted methodologies: capitalisation of maintainable earnings for established trading businesses, EBITDA or revenue multiples drawn from comparable transactions, net asset value for asset-heavy or underperforming entities, and discounted cash flow where forecasts can be substantiated. Which methodology leads depends on the entity, the evidence available and the purpose of the engagement. The output of this step is a supportable range for the business as an operating whole, before any financing structure is considered. Enterprise value answers the question a trade buyer asks — what would I pay for the business and its operations? It deliberately ignores how the business is funded and what it owns beyond its operations, which is precisely why it cannot be handed straight to the shareholders.
Step two: the bridge from enterprise value to equity value
Equity value is what the shares in total are worth, and it is rarely the same number as enterprise value. The bridge between the two is a series of balance-sheet adjustments, each of which needs evidence rather than assertion:
- ·Deduct net debt — borrowings, bank facilities drawn, related-party loans owed by the company and debt-like items such as unfunded employee entitlements or tax liabilities outside the normal cycle come off the enterprise value, net of cash the business does not need to operate.
- ·Add surplus assets — assets the business does not need to generate its earnings (an investment portfolio, a property held outside operations, genuinely excess cash) are added back at market value, because a buyer of the operations would not have paid for them in the earnings multiple.
- ·Adjust for working capital — if the business is running with less working capital than its operations require, the shortfall reduces equity value; a demonstrable surplus runs the other way. The normal level is evidenced from the entity's own trading history, not assumed.
- ·Classify related-party balances — loans to and from shareholders and associated entities must be resolved as debt, equity or distributions before the bridge is reliable. Division 7A loan accounts are the most common complication here, and their treatment can move the equity value materially.
Why a 20% parcel is not worth 20% of the company
Divide equity value by the shareholding percentage and you have a pro-rata figure — but pro-rata is not market value for a minority parcel. A 20% shareholder in a typical private company cannot control dividends, cannot set remuneration, cannot force a sale of the business and cannot stop the majority doing any of those things. A willing but not anxious buyer prices that lack of control, and the result is the minority interest discount. In Australian practice discounts in the 10–35% range are common, but the specific quantum must be reasoned from the facts, not copied from a table: the rights attached to the class, the protections in the shareholders' agreement, the dividend history, the number and disposition of other holders, and the realistic prospect of the company being sold all bear on it. A parcel carrying board representation and meaningful veto rights supports a smaller discount than a bare 20% holding with no protections.
Marketability: the discount for shares you cannot readily sell
The second adjustment is for marketability. Listed shares can be sold this afternoon at a visible price. Shares in a private company cannot — there is no market, the pool of realistic buyers is small, pre-emptive rights typically force the parcel to be offered to existing shareholders first, and a sale can take months or fail entirely. A buyer pays less for an asset they may struggle to exit. Whether lack of marketability is discounted separately or wrapped into a single combined discount with the minority adjustment is a methodology choice the valuer makes and documents. What matters for a defensible file is that the discount is justified by reference to the actual rights and restrictions attaching to the parcel — the constitution, the shareholders' agreement, the transfer provisions — with the reasoning written down. An unexplained percentage is the first thing a reviewer queries.
Shareholders'-agreement pricing clauses vs market value
Many shareholders' agreements contain a pricing formula for exit events — a fixed multiple of EBITDA, net assets plus an agreed goodwill figure, or fair value as determined by an independent valuer. Two different questions arise here, and they have different answers. What price changes hands between the parties is a contractual question: if the agreement binds the parties to a formula, the formula generally governs the transaction, and how it applies is a matter for the lawyers. What value applies for tax is a separate question: where the parties are not dealing at arm's length, CGT is assessed on market value under the market value substitution rule in s 116-30 ITAA 1997, regardless of the formula. A clause price below market value does not reduce the vendor's CGT — it simply opens a gap between the cash received and the value assessed, which the accountant then has to manage. This is exactly the situation where an independent market valuation is needed alongside the contractual price. We prepare the valuation; the lawyer and accountant handle the contractual and tax application, which is their domain, not ours.
The events that trigger a share valuation
In practice, private company shares get valued because something has happened. Four triggers account for most of the engagements we see, and each maps to a dedicated Prismi service:
- ·Buy-sell events and shareholder exits — a shareholder leaving under a buy-sell agreement, a disputed parcel value, or a buyback of a departing holder's shares. Our private share and unit valuation service covers these, including the class-rights and discount analysis.
- ·Employee share scheme issues — the market value of the shares at grant and at the taxing point drives the employee's assessable income under the ESS rules, and eligible start-ups can use the safe-harbour valuation methods set out by legislative instrument. The share valuation establishes the value; the accountant applies the ESS treatment.
- ·Deceased estates — the executor needs a value for probate and the beneficiaries need a cost base, usually as at the date of death, which makes these retrospective engagements. Where the deceased held a minority parcel, the discounts discussed above apply at that date. Our estate and succession valuation service is built for this.
- ·Exiting founders and succession — transferring shares to the next generation, to management or to a family entity raises market value substitution squarely, because the parties are rarely at arm's length. Our related-party transfer and succession valuation work covers these transfers.
What a defensible per-share conclusion looks like
The file behind a per-share figure contains more than arithmetic. It holds the constitution, the shareholders' agreement, the class rights and the share register; the enterprise valuation with methodology selected, justified and cross-checked; the bridge itemised with evidence for each adjustment; the discount reasoning tied to the actual rights of the parcel; and sensitivity analysis showing how the conclusion moves under different assumptions. Prismi prepares these as independent engagements — senior-reviewer signed, independence stated, fees fixed at engagement and never contingent on the outcome, working file retained ten years. Comprehensive (from $3,995 + GST) suits most share parcels in trading companies; the Defensible Valuation File (from $8,995 + GST) suits contested exits, estates and higher-value transfers, with retrospective dates carrying a $495 surcharge each. The report is prepared with ATO market valuation expectations in mind and documented so the position is defensible if reviewed — no more can honestly be promised. We are not a registered tax agent and do not provide tax or legal advice; your accountant applies the valuation to the tax position and your lawyer to the agreement. And where a client asks us to conclude at a target per-share figure, we will say so and decline the engagement on those terms.