Valuation Snapshot - Spring 2018

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Spring 2018

Valuation Snapshot

Welcome to our twelfth edition of Valuation Snapshot. In this regular publication we look at the trends and issues behind business valuations, and provide bite-sized advice that can help you and your clients when valuing a company.

2017 - a story of “steady as she goes” Looking back at 2017 for which we now have full data, our index sagged a little in Q1 but was up 4.7% by end of Q2. Alas much of that growth has steadily slipped away through the

rest of the year. Sometimes the constituents of our index give conflicting messages. Not so this time – they’ve all fallen, but to be positive the position by the end of the year is up 1.6%.

Key valuation indices Q4 2007 to Q4 2017


Choosing an expert witness to value a business for divorce It’s important to choose the right expert, yet professionals who hold themselves out to be qualified to provide valuation opinions don’t all have the same experience or qualifications. Using a valuer with the wrong experience can undermine the credibility of the valuation and expose the appointing firms to criticism.

the business owner’s understanding of the company? It’s not enough to get the “right” figure - it also has to be easy for the parties and the judge to follow, and to make use of the report.

What to look for

Are the rates quoted about right for the type of assignment? Fees that are too low are a warning signal and fees that are too high will put off the parties from appointing the expert. Will the expert quote a fixed fee? Do they typically stick to their original estimate?

Reputation and experience What can you learn about the valuer’s experience and qualifications? Is their “day job” in another field with valuations as a side-line? For example, tax advisers often and quite legitimately get involved in valuation negotiations with HMRC. However they may not have the research resources, or a broad enough perspective and depth of insight, to produce a rounded and properly argued valuation opinion.

Style of reporting How much of the valuer’s reasoning and research are they prepared to share in their report? Some valuers – with one eye on liability and their PI cover – produce short reports with one or two intuitive leaps covered by phrase “in my judgement”. In contrast if your valuer shares the underpinning data and logic, the court can see how the opinion has been arrived at. And it may be that the parties will more readily accept the outcome.

Cost

Process What is the expert’s process? Some never leave their desks and prepare their opinions based on the paperwork submitted. Best practice is to visit the company and interact with the director(s) to better understand it. Not to do so is to leave the valuation open to challenge based on an inadequate assessment of the business.

Sector knowledge Does the valuer need to be a specialist in the sector in which the business operates? Usually no. A good valuer will have experience of a wide variety of differing businesses and the principals are the same for all. But you might need specialist input to value unusual assets.

Clear, cogent, persuasive Communication style is important. Are the valuer’s reports cogent, well-reasoned and easy to follow? Does the report add value to

Lake Falconer lake@pemcf.com


Ouch! Avoid picking the wrong valuation An employee gets shares with two different valuations but if they pick the wrong one they pay 37% more tax. When someone gets shares by reason of employment or status as an officer holder, and this doesn’t happen via a tax-favoured share scheme, it usually creates an Income Tax liability (possibly National Insurance too). The employee picks up the tax liability on the difference between the acquisition price and the market value at the date of acquistion. The rather complicated tax legislation that applies here means that a share actually has two values! One value incorporates all of the restrictions attaching to the shares such as the requirement to sell on cessation of employment or the Directors’ ability to block a transfer (the Actual Market Value) and a second value that ignores such restrictions (the Unrestricted Market Value).

This is because any proportion of the UMV that wasn’t paid up nor subject to income tax on acquisition will be taxed as income on that disposal rather than being taxed as a capital gain. This can all get very expensive for the employee, especially if the shares are sold for a much greater price later on once the company has grown. For example, a 20% differential between AMV and UMV on acquisition means that 20% of the proceeds received on disposal will be subject to Income Tax and National Insurance then.

The Result

The Election

Given that the desired outcome is surely to pay Capital Gains Tax charged at 10% if Entrepreneurs’ Relief is available and Income Tax and National Insurance rates can reach a combined 47%, an additional rate taxpayer could end up paying c37% more tax on the growth in value. Ouch!

Unless the acquiring employee and employer jointly elect within 14 days of the date of acquisition to pay Income Tax on the Unrestricted Market Value (‘UMV’), the default position is that the Actual Market Value (‘AMV’) applies. This is a Section 431 Election.

So the benefit of making a Section 431 Election could be huge - and attention must be given to the merits of making this election at the point of acquisition - bearing in mind that there’s only a limited time window in which to make the election.

Often the difference in Income Tax between the AMV and UMV at the date of acquisition is not great, but the absence of a Section 431 Election can result in unexpected Income Tax and National Insurance liabilities on a future disposal.

Matthew Eady meady@pem.co.uk


PEM Valuations From time to time, your clients may ask you how to value their business. Such requests could be triggered by: ▪▪ ▪▪ ▪▪ ▪▪ ▪▪ ▪▪

Shareholder exit Disputes Restructuring Business planning Tax and Accounting Regulatory reasons

Yet for many advisers, valuations are not their day job. This is where the PEM Valuations team can help.

Why refer your clients to us? Focused Our valuations are produced by a specialist, multidisciplinary team with a valuations focus.

Personal We have a flat structure so clients always receive cost effective senior level attention.

Commercial Our real world experience in company sale and purchase negotiation means we don’t just claim to be commercial, we have the transaction record to prove it.

Tailored We do not use a software driven or “form-filling” approach. Our reports are based on a thorough understanding of the business to be valued, and tailored to the specific needs of the owner.

Get in touch: 01223 728 222 pemcf.com/valuations PEM Corporate Finance LLP is authorised and regulated by the Financial Conduct Authority, registered number 212875. Registered in England & Wales, company number OC302288. Salisbury House, Station Road, Cambridge, CB1 2LA. If you no longer wish to receive this publication, or if you have had a change of address, please email info@pemcf.com.


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