Business valuation

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Business valuation

A business valuation for a private company or a business partnership is not always straight forward. For private businesses, we have valued shares for fund raising, shareholder sales, partner departures, EMI options and other employee equity incentives.

Valuation of a business – issues we resolve

Share valuation is not a precise science. Many clients find the jargon baffling. There are no fixed rules and experts arrive at different numbers. Our experience guides you and put propositions into context. We commonly:

  • Negotiate the shareholders’ agreements or articles of association to maximise your position when later valuing and selling your shares. In addition, we improve your return on investment by ensuring the documentation is in your favour right at the beginning.
  • Plan capital gains tax to minimise tax payable on gains. We often undertake exercises when a shareholder is leaving the business and wants to achieve “fair value” for the shares. Our share valuation expertise overlaps with our tax expertise which is a benefit to you as often the two go hand in hand.
  • Prepare share valuations for EMI and Employee Shareholder Shares purposes to add certainty to the share incentive scheme you implement. We value shares in private companies (UK and foreign) and share options for share schemes before the scheme is put in place and get a clearance from HMRC on our values. We also design and draft share scheme documentation. When share or share option schemes are concerned we are a one stop shop for you.
  • Negotiate share values with HM Revenue and Customs which is one of our core areas of expertise. From early 2016 HMRC withdrew post-transaction valuation rulings and it is now important to agree values in advance of transaction in shares as once carried out the values can’t be agreed after the fact. The negotiations with HMRC require a blend of valuation expertise and knowledge of the way HMRC operates and we do have the knowledge you will require.
  • Evaluate given your particular circumstances. Often we blend our knowledge on the market with our analysis of the legal documentation and the commercials of the business

Negotiation of share values in commercial transactions

We often act for companies and business investors on transactions in shares. We also value minority shareholdings on shareholder exists.  There are multiple valuation methodologies. Choosing the right one for your business takes experience.

Different approaches to valuation depending on revenue model

Conventionally, the size of the shareholding and the purpose of the valuation will dictate the valuation basis. Typically, a dividend basis valuation is used to value minority shareholdings whilst a majority interest will indicate earnings basis valuation. However, the starting point when valuing a business is to look at how the business makes money. Is it machinery heavy? Is it a people business?

There are three main types of business valuation which reflect the money making capacity and maturity of the business:

Dividend basis

The dividend basis of valuation is adopted for a shareholding where the main benefit of holding shares is the right to receive dividends. It is usually found in small shareholdings which have little influence over sale of assets or business and must rely on the dividend policy for profit. Dividends method looks at the company’s past dividends, dividend growth patterns and fluctuations and the dividend policy going forward.

Earnings basis

The earnings basis of valuation is adopted when the value of the shareholding lies in the ability to turn current profits of the company to one’s advantage, i.e. control of the company. It looks at the future profit-generating potential of the company after tax, interest and dividends are paid out (known as ‘maintainable profits’). The maintainable profits are capitalised and multiplied by a quoted company equivalent ratio to give the present value of the company. The method is mainly used to value majority shareholdings or entire businesses where one shareholder has control over the future of the business.

Asset basis

The asset basis valuation is used either on company’s liquidation or where the company’s asset backing is greater than the capitalised value of dividends and earnings. It is supported by the idea that the asset backing of the business must be reflected in the share price.

Adjustments to profits

In order to arrive at the value of the shareholding the value of the business needs to be discounted to reflect commercial and legal aspects of the business. Before any discount is applied company profits often need to be adjusted to reflect the market conditions. For example, if the directors have not been paid commercial salaries company profits will have to be adjusted.

Factors that impact minority discounts

Many different considerations are applied and often a valuation is a combination of various approaches. There will be common themes such as:

Size of shareholding

The importance of shareholding size is primarily in terms of control over company’s decision making. The level of control depends on:

Voting rights

Voting rights in shares have inherent value because voting power offers influence over how profit is enjoyed, whether assets (including the business) are sold, how the company is managed and how the internal market in the shares is operated. However, voting power is only indicative of control and does not need to correspond to the number of shares held. If it can be shown that a majority shareholder has no effective control over the company it will be taken into account. 51% + shareholders are presumed to have control over the company’s affairs.

The right to veto certain decisions

Typically, a minority shareholder who holds 25% or more voting rights can block a special resolution of shareholders which means that he can veto certain decisions of the majority shareholder. However, a shareholders’ agreement or articles of association can also provide that a shareholder with an even smaller than 25% shareholding can veto decisions in which case the value of his shares increases.

The right to have a director on the board

Being able to appoint a director gives a shareholder insight into everyday running of the company. It offers control over directors meetings and influence over board meetings. Not many minority shareholders have a right to appoint a director unless they are director-shareholders themselves but a 25% + shareholder would usually expect to have a right to appoint a director.

The number of shareholders

The division of ownership of shares has an impact on the impact shareholders can exert. If there are two shareholders with the 80%-20% split, the minority shares have a ‘nuisance value’. If however there are five shareholder holding 20% each then the minority shareholder has greater control and the value of his will increase.


The marketability of the shares plays a role in valuation. How easily can the shares be sold? Are there any restrictions on the sale of shares in the corporate documentation? The degree of influence depends upon a range of factors, both legal and economic and can vary significantly from company to company. For example, one company may permit shares to be transferred to non-members while another may impose restrictions on transfer. Any restrictions on transfer decrease the value of shares as marketability of shares is low.

Future income potential

Future ability to increase earnings, e.g. when an IPO is planned or imminent, will impact the value of the shareholding.

Strategic value

There might be reasons why a minority stake might be particularly valuable. Minority shareholding can have strategic value when it can prevent a business sale or when mere possession of a single share can ensure access to the customer base. The strategic value is enhanced when there are no transfer restrictions on minority shares in the articles of association because shares can be transferred to e.g. a strategic investor or competitor.

Information available

Small minorities are generally assumed to have limited access to unpublished information and no guarantee of board representation. However, this may not be so if the shareholding has some strategic significance. Directors have no duty to disclose confidential information without board consent so unless special circumstances exist no knowledge about additional facts will be presumed.

Minority shareholding discounts can range from around 5 – 90% depending upon the facts.

How do Articles of Association impact the value of shares?

Articles of Association set out the rights attaching to shares as well as restrictions on the transfer of shares. They determine discounts which need to be applied to the shares. A review of Articles of Association is one of the first steps in share valuation.

Articles of Association will be inspected for the following provisions:

  • Voting rights attaching to shares and provisions regulating when voting can be exercised. The more control over company’s decision voting, the higher value of the shares.
  • Casting vote – a casting vote swings an otherwise deadlocked vote. A casting vote gives control to a shareholder in a 50-50% share split and can carry a premium.
  • Dividend rights attaching to shares and a dividend policy setting out when a dividend will be paid out. Dividend entitlement which is fixed, e.g. preference shares, increases the value of shares.
  • Capital rights – as with voting rights the greater entitlement to the company’s capital the higher value of shares.
  • Pre-emption rights – it is a kind of restriction of transfer. It means that before the shares can be sold off to a third party they have to be offered to existing shareholders first.
  • Restrictions on transfer and permitted transfer provisions – Articles often specify who the shares can and can’t be transferred to which impact marketability of shares. Restrictions increase the discount value of minority shares and lower their value.
  • Fair value provisions – bespoke (not model) Articles often provide mechanisms explaining how company shares should be valued when sold off.
  • Drag and tag along rights – the rights to allow a minority shareholder to benefit from the same rights and protections as the majority shareholder on business sale.

Articles of Association can be model or bespoke and influence the applicability and size of discount used to value shares. We often review company’s Articles of Association to put you in a position where the discounts are more advantageous to you.

How does the shareholders agreement impact the value of shares?

Unlike Articles of Association, Shareholders Agreement is a private document which is not filed at Companies House. It is completely flexible. It can contain the same provisions as Articles of Association such as prohibitions on transfer and often goes further than the Articles.

The agreement can constitute an agreement to repurchase shares at a specified price or an option to buy or sell shares. Every shareholders agreement is different and its impact on the value of shares needs to be carefully considered.

Valuation of shares for employee share schemes

Share valuation is often the first step when implementing a successful employee share scheme. This is especially true for EMI and ESS schemes. This is because shares and options given to employees will crystallise unexpected tax charges in the hands of employees if they are given at an undervalue. A share valuation is not compulsory but if the value is agreed with HMRC before the transaction, a tax charge can be avoided.

HMRC offers a pre-transaction valuation service for employee share schemes. They review and agree share valuations for private companies. We regularly act as an independent business valuer for the purposes of HMRC clearances and negotiate values for our clients.

Valuing shares and options for the purposes of employee share schemes is a specialist skill. Employees usually get shares and options which are heavily restricted and which can be clawed back in many circumstances. Valuing shares and options for employee share scheme purposes requires a fiscal valuation which is usually lower than the actual market value.

Negotiation of business values with HMRC

Often shares and options are valued to ascertain the tax payable on the transaction, e.g. when employees are awarded EMI options below actual market value or on award of shares to a director. Whilst it is not a legal requirement that shares or options are valued, if it later turns out that shares or options were under or overvalued on grant, tax liabilities and interest can kick in.

As a rule of thumb, a valuation for tax purposes (known as a ‘fiscal valuation’) is typically lower than a business valuation.

Where a transaction in shares potentially triggers tax charges HMRC offers an advance clearance procedure. Agreeing a suggested value with HMRC specialist Shares and Valuations Unit (SAV) increases the certainty of transactions and avoids future difficulties when company’s circumstances have changed. We know what HMRC is looking for in a valuation and can guide you through writing an advance clearance application.

Post-transaction valuation check

For years it was possible to agree values with HMRC after the transaction has been carried out. Since spring 2016 this is no longer possible. HMRC withdrew its post-transaction valuation checks and will only negotiate values before an award it made. If you consider granting shares or options agree your numbers with HMRC in advance.

Track record – case study

We acted for a former chairman and shareholder of a Singaporean medical services provider company. The client was gifted redeemable preference shares which he was allowed to retain following his exit from the business.

The client approached us when he no longer worked for the business. We valued his shares for the purposes of reporting the income tax liability on tax return and payment of tax due before the deadline to avoid interest.

The Company’s balance sheet had a large provision for internally generated goodwill which artificially inflated the value of the company. However, the company had a history of non-payment of dividends and it was unlikely that our client would receive dividends in the foreseeable future. Despite rumours about an IPO many shareholders were pulling out from the company and it was it was common knowledge that exit was unlikely.

We successfully argued with HMRC that the restrictions in the Articles (shares could be redeemed at any time) and the remote possibility of exit mean that shares which can be redeemed at par value have little value for tax purposes. The client submitted the values agreed by us on his tax return and carries on investing in private companies across Asia.

Business valuation is critical to the way your company raises finance and retains talent. A pre-approved share valuation saves you trouble later down the line. Before a share sale a share valuation can reveal issues on sale and allows you time to rectify these and maximise value of sale. Business valuation is an art and we are delighted to discuss it with you.