Share Valuations

Valuation is a complex issue Valuation is a complex issue

Most of the time, a share valuation is of mere academic interest to an entrepreneur - a living has to be made from the business. Its value is generally only of real interest if a serious purchaser - with genuine 'readies' - wants to buy the company.

by David Stebbings, of Equity Value

David Stebbings

David Stebbings

Share valuation can appear to be a mysterious science. However, it will have some important implications for a number of situations that could be around the corner and there are practical considerations where advanced planning could be beneficial.

Situations where share valuations could be required include:

•     When operating share schemes for employees
•     In business disputes
•     As part of divorce proceedings
•     Establishing the probate value of shares on death

Business Disputes

Business disputes can be a tricky area and it is important to find out whether there are shareholder agreements in place, specifying the valuation method to be adopted. Of particular importance will be whether the valuation method should represent ‘fair value’ (taking into account the loss to one party and the gain to the other) or ‘market value’, where only the actual holding in question is valued. It will also be important to decide whether or not a discount for minority on shareholdings should be applied.

Whilst instinctively it may seem that a 10 per cent holding in a company would be equal to 10 per cent of the total value of that company, in a market valuation this may not be the case. The issue of control provides logic for this. An un-influential minority holding does not entitle the shareholder to any real say in how the company is run and the shareholder is unlikely to be able to make much impact on policy. It is not uncommon for a discount of up to 90 per cent to be applied on small minority holdings which will obviously have an enormous effect on the value of those shares.

It is easy to see how disputes could arise between shareholders where no pre-existing agreements on valuation methods are in place. An independent advisor can get involved both in advance planning on how share valuation should be reached in case of dispute – often vital for the continuing operating health of the company - and also in giving a professional valuation opinion. An advisor can also be instrumental in successfully increasing the valuation of shares for clients, leading to them receiving significantly more funds.

Employee Share Schemes

In an employee share scheme situation, some entrepreneurs miss the exciting tax planning opportunities which are available to make such methods of succession planning highly tax-efficient.
With a growing company there can be opportunities to utilise the statutory reliefs to create legitimate tax savings, supported by professional valuation.

Other Situations

One result of the somewhat arcane and complex case law and practice related to share valuation is that it is prudent to take professional advice. Solicitors and accountants often use an advisor’s services in negotiating independent valuations for tax purposes with HM Revenue and Customs.

Summary

Valuation is a complex issue and taking advice, or in the right situation some steps in advance, can help to anticipate and avoid problems. 

Equity Value is an independent share valuation service provider