Valuation of shares in a private company – what’s involved?

Valuation of shares in a private company, what’s involved?

When a private company’s shares are bought and sold by unrelated third parties, such as in a buy-out situation, the value of the shares will be the price negotiated by the parties. This forms the basis of any tax implications relating to the transaction.

There are various scenarios in which shares can be transferred between existing shareholders or by virtue of employment. We are often asked to provide valuations in these instances. In this article, we will look at some of the points to consider when performing valuations.

Valuations fall into two categories. The first is when we are making a valuation seeking agreement from HMRC in respect of a transaction in shares. The most common of these is when a client wishes to implement an EMI scheme. We will work with the client to prepare a valuation report and then request HMRC to agree the valuation. This has the benefit of providing certainty both for the client and employees.

The second type of valuations are those that cannot be agreed with HMRC in advance.

Examples include:
• A company giving non-EMI shares to a key employee.
• Transactions between existing shareholders who may be connected or who are required to undertake an independent valuation by virtue of the Articles of Association or Shareholder’s Agreement.

Taxation on such transactions is accounted for through self-assessment based on the independent valuation.

Which valuation method is right for my company?

In each case, the starting point is to decide on a valuation methodology from the many different ones available.

Depending on the profile of the company we use one of four methods:
1. A suitable multiple applied to maintainable profits
2. Comparable third-party transaction
3. Net assets
4. Discounted cash flow.

Discussions with the client are an important part of this to ensure all relevant factors have been considered.

Once the entire share capital has been valued, it is necessary to account for the nuances of a particular size of shareholding. A 5% holding of shares in a company would not be valued at 5% of the total company value due to the lack of control that such a small shareholding carries. We therefore need to determine discount rates that reflect aspects such as minority/majority status and any restrictions on the shares that may apply.

AMV or UMV – what’s the difference?

For shares that are being given to someone by virtue of their employment, whether under an EMI scheme or otherwise, matters are further complicated by the fact that two valuations will need to be calculated. These are known as the Actual Market Value (AMV) and the Unrestricted Market Value (UMV). The key difference is that the AMV is a valuation that takes into account all the restrictions that tend to exist under employee share schemes.

This may include non-voting rights, drag-along rights and non-transferability prior to an exit event. The UMV assumes that these restrictions no longer exist and is therefore higher. The importance of the two values is due to the unique way employment-related securities are taxed. In particular, the split between income and capital.

At Allegro Tax we have experience in carrying out valuations for many different types of shareholdings. We include our clients at all stages of the process to ensure the valuation process is robust.

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