Private companies have to undergo a fiscal valuation exercise when making awards of shares or options under a share scheme to determine for tax purposes what the value of those awards would be, hypothetically, if they were to be placed on an open market.

Fiscal valuations are understandably a lengthy and complex process relying on multiple assumptions and the subjective judgements of individuals. There is no one singular way to value a private company and approaches can be more or less suitable depending on the characteristics of the business. 

The most popular and well known methodology  is the earnings multiple, whereby a company’s EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is calculated and a multiple applied to this figure to reach an Enterprise Value. This Enterprise Value is meant to represent the value of the potential future earnings of the business. It may then be adjusted for cash and debt to reach an Equity Value. 

Whilst EBITDA multiples are widely used, they are less suitable for loss-making companies such as Start Ups. For a banking or financial institution a net assets valuation basis may be more appropriate, just as a company with recent fundraising activity would have to factor these real prices paid.

A myriad other factors also inform fiscal valuations: the capital structure, the rights and restrictions of the shares over which awards are being made, any offers made by third parties to purchase the business, and so on.