valuation of shares of retiring Director in an IT Company

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Suresh Jain (Querist)
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13 May 2009 My client is leaving present organisisation in which she is a Director and is holding 20% shareholding in the company. She wants to know the value of her shares as on date. It is a running private ltd company and will continue business in future.The present shareholding will be brought by the other directors in the company. As per balance sheet as on 2008 the reserves are Rs 7 crores and share capital is Rs 1 croroe.

Suresh Jain

Suresh Jain (Querist)
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29 May 2009 pl answer

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2025 Valuing shares of a retiring director in a running private limited IT company involves several steps and approaches. Here’s a straightforward guide based on your info:

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### Facts Recap:

* Director holds **20% shares**.
* Company is a **running private limited IT company**, business continues.
* Balance Sheet (2008):

* Reserves = Rs 7 crores
* Share Capital = Rs 1 crore

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### How to Value Shares?

#### 1. **Net Asset Value (NAV) Method**

* Calculate the **net worth**: Share Capital + Reserves = Rs 8 crores.
* Total shares = Rs 1 crore face value (assuming Rs 10 face value, total shares = 10 million).
* NAV per share = Rs 8 crores / total no. of shares.
* Share value for 20% = 20% of NAV-based valuation.

*However, NAV alone may undervalue a going concern IT company since it ignores future earnings.*

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#### 2. **Earnings or Profit Earning Capacity Method**

* Based on the company’s **future profit potential** (discounted cash flows or earnings multiple).
* Take average past 3–5 years profit after tax.
* Apply an industry-appropriate **Price/Earnings (P/E) ratio** (IT companies typically have higher multiples).
* Multiply earnings by P/E to get the company’s overall value.
* Deduct any liabilities if required.
* Calculate 20% of the final valuation.

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#### 3. **Fair Market Value (FMV)**

* Valuation usually blends NAV and earning capacity methods.
* FMV = Average of NAV and Earnings-based value.

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### Practical Steps

* Obtain audited financials for last 3–5 years.
* Calculate average PAT.
* Apply suitable P/E multiple (industry benchmark).
* Confirm any debts/liabilities.
* Compute 20% share value.

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### Summary:

* **Share Value = 20% × (Average of NAV and Earnings-based valuation)**
* If more precision needed, consider hiring a **Registered Valuer** or professional valuer.

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If you want, I can help you prepare a simple Excel model or formula to do this calculation — just let me know!

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