valuation of shares of retiring Director in Pvt. Ltd Co.

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Suresh Jain (Querist)
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18 May 2009 My client X is holding 20% shares in Y co. in which X is Director.

X wants to sell its shareholding to other existing shareholders in the co.

What shopuld be the valuation of shares of X in Y co.

Y co. is doing IT business for last 15 years. It has resrves of around 8 crores and turnover is around 100 cr.

What method should be adopted for valuation. Pl inform with some xamples. If any further questions pl do ask.

Thanks

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 For valuing the shares of a retiring director holding 20% in a private limited IT company with 15 years of operations, reserves of about ₹8 crores, and a turnover of ₹100 crores, here’s a practical approach:

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### Recommended Methods for Share Valuation

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

* **Calculate Net Worth:**
Net Worth = Share Capital + Reserves = ₹8 crores (assuming share capital is part of this).
* **Value per Share:**
Divide Net Worth by total number of shares to get per share NAV.
* **Share Value for X:**
Multiply NAV per share by number of shares held by X (20% of total shares).

*Example:*
If total shares = 1 crore, NAV/share = ₹8 crores / 1 crore = ₹8 per share.
If X holds 20 lakh shares (20%), value = 20 lakh × ₹8 = ₹1.6 crores.

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

* **Step 1:** Calculate average profits after tax (PAT) of last 3-5 years.
Let’s say average PAT = ₹10 crores.
* **Step 2:** Apply industry P/E multiple (for IT companies, it can be between 15-25 depending on growth, risk).
Assume P/E = 20.
* **Step 3:** Compute Company Value = PAT × P/E = ₹10 crores × 20 = ₹200 crores.
* **Step 4:** Deduct any debt if applicable (say none or adjust accordingly).
* **Step 5:** Share Value for X = 20% × ₹200 crores = ₹40 crores.

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#### 3. **Weighted Average of NAV and Earnings Method (Fair Market Value)**

* Average of above two valuations:
(₹1.6 crores + ₹40 crores) / 2 = ₹20.8 crores approximately.

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### Notes:

* NAV method gives a conservative value reflecting net assets.
* Earnings method reflects future profit potential and goodwill.
* For an IT company with good profitability and growth, **earnings-based valuation** tends to be more realistic.
* Share transfer agreements often use a blend or negotiate between these values.
* In practice, companies often hire **a professional valuer** to arrive at a fair and justifiable value.

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### Additional Questions to Ask for More Precision:

* What is the exact share capital & number of shares issued?
* Are there any outstanding liabilities or loans?
* Profit figures for past 3-5 years?
* Any special rights attached to shares (e.g., preference shares)?
* Is the company debt-free or carrying debt?

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If you want, I can prepare a valuation template or help draft a valuation report with your data. Would you like me to assist with that?

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