- September 26, 2023
- Posted by: Aki Kojima
- Category: Inheritance, Gift, Equity Valuation
Small business owners are often shareholders.
However, they rarely buy or sell their shares.
This is because they are inextricably linked to management rights.
Since they rarely buy or sell, it is crucial to understand how stock prices are calculated accurately, and you don’t get a simple market price.
This section will review the primary stock valuation method and then consider why it is difficult for small businesses to move their shares.
Basics of Stock Valuation
There are three main methods for valuing stock prices
Dividend Discount Valuation Method
The dividend discount valuation method is among the most common ways to evaluate a company’s stock price.
It calculates the value of a stock by reducing the dividends that the company expects to pay shareholders in the future to their present value. Specifically, future dividends are converted to current value using a specific discount rate, and the sum of the two is used to evaluate the share price.
Comparable Industry Method
The Comparable Industry Method evaluates the stock price of a target company based on the stock prices and financial indicators of other companies in the same industry and market. Ratios such as PER (Price price-earnings ratio) and PBR (Price-to-book ratio) among similar companies are used to calculate the relative value of the companies.
Net Asset Value Method
The Net Asset Value Method is one of the methods used to evaluate a company’s stock price. The stock price is calculated based on the company’s net assets (equity capital), the amount obtained by subtracting total liabilities from total assets. This method directly evaluates the actual value of a company, i.e., the value of assets held by the company.
The net asset value per share is calculated by taking the difference between total assets and total liabilities on the company’s balance sheet and dividing it by the number of shares outstanding.
Management might consider the price of the funds initially divided by the hypothetical number of shares. However, as mentioned above, the calculation will accurately reflect the stock’s market value at the time, not its par value.
The stock price may be higher than expected.
The trouble is that a higher price means higher taxes.
In this case, it could be a higher Gift Tax(Zouyozei[贈与税])or Inheritance Tax(Souzokuzei[相続税]).
When taxes are higher, you need cash.
However, it is difficult to sell the shares because you cannot give the small business management rights to someone else.
Passing it on to a relative may also be challenging.
Small business stock transfers should be planned.
As you can see, even small business stock may be subject to gift and estate taxes when you move.
So, moving or selling small business stock requires planning.
Based on proper valuation, the best timing and transfer method can be considered to maximize the company’s value.
Our firm also provides stock valuation services for small and medium-sized businesses.
Please see below for more information.