How to Calculate the Fair Value of Unlisted Shares Before Buying or Se... How to Calculate the Fair Value of Unlisted Shares Before Buying or Selling Read more

A lot of smart investors are really keen on unlisted shares these days. They're hoping to get in early on high-growth companies before they even hit the stock market. But here's the tricky part: since these shares aren't traded publicly, it's pretty hard to tell if you're paying a fair price or letting them go for too little. That's exactly why knowing how to figure out the fair market value of unlisted shares is so incredibly important.

In this article, we'll dive into what "fair value" actually means for a company's shares before it's listed, why it's such a big deal, and the main ways you can accurately calculate it.

1. What is the Fair Value of Unlisted Shares?

The fair value of unlisted shares is the estimated price that a buyer and seller would agree upon in an arm's-length transaction, assuming both have reasonable knowledge and are willing participants. Since these shares are not listed on public stock exchanges, investors must rely on alternative unlisted shares valuation methods to determine their worth.

Fair value of unlisted shares is not the same as market price (since one doesn't exist here), but rather the most probable price based on financial fundamentals, industry trends, and investor sentiment.

2. Why Calculating Fair Value Is Important

• Avoid Overpaying: Overvaluation can significantly reduce your investment returns.

• Spot Hidden Gems: Underpriced shares may deliver multi-fold returns when the company goes public.

• Make Smarter Exits: Knowing the intrinsic value helps time your sale and secure better profits.

• Negotiate Effectively: In secondary deals or pre-IPO transactions, data-backed valuations improve your leverage.

3. Key Methods to Calculate Fair Value of Unlisted Shares

A. Net Asset Value (NAV) Method

What It Is: This method values the company based on the net worth of its tangible assets.

Formula:

Example:

• Total Assets = INR 100 crore

• Total Liabilities = INR 40 crore

Outstanding Shares = 5 crore

So, NAV=60 crore/5 crore shares=INR 12 per share share

Best For:

• Asset-heavy companies (e.g., real estate, manufacturing)

Limitations:

• Ignores future growth

• Not ideal for tech or service-based companies with intangible assets

B. Discounted Cash Flow (DCF) Method

What It Is: Projects future cash flows and discounts them to present value to arrive at the fair share price.

Formula:

Where:

• = Year

• = Discount rate (usually 15-20%)

Example: If a startup projects INR 100 crore per year for 5 years at a 20% discount rate, DCF helps determine the present value of those cash flows.

Best For:

• Growth-stage companies and startups with strong earnings potential

Limitations:

• Relies heavily on assumptions

• Sensitive to interest rate changes and market volatility

4. Factors That Affect the Fair Value of Unlisted Shares

• Financial Performance: Revenue growth, profit margins, and cash flow stability

• Management Quality: Experienced leadership often commands a premium

• Market Conditions: Industry demand, economic outlook, and policy support

• Regulatory Risks: Sectors like fintech or EVs may have changing compliance norms

• Liquidity Premium: Investors often expect a discount due to lack of liquidity

• Recent Transactions: Prior deals involving the value of unlisted share help anchor valuations

5. Mistakes to Avoid When Evaluating Unlisted Shares

• Using Only One Valuation Method: A blended approach (NAV + DCF) offers better accuracy.

• Ignoring Industry Benchmarks: Compare valuations with similar companies in the same sector.

• Neglecting Qualitative Factors: Brand value, customer loyalty, and innovation capacity also matter.

• Overlooking Exit Timelines: Know when and how you'll monetize the investment (via IPO, acquisition, etc.)

6. Bonus Tip: Use Professional Platforms & Research Tools

Platforms like Sharescart.com offer curated research, crowdsourced valuation insights, and transaction data for hundreds of unlisted companies. These tools help bridge the information gap and make fair market value of unlisted shares assessment more reliable.

Final Thoughts

Valuing unlisted shares isn’t an exact science, but with the right tools and frameworks, you can make informed decisions that maximize returns and minimize risks. Whether you're an early-stage investor or looking for pre-IPO opportunities, understanding how to calculate fair market value of unlisted shares is the first step to successful investing.