At Pett Franklin we pride ourselves on being an integrated service that offers both legal and accounting services. Unlike other law firms, we do not outsource any of the financial work involved in setting up a share scheme and we are able to carry out company valuations in house. This allows for a smoother process, tighter project management and an improved customer experience.
Valuations for tax purposes are lengthy and complex processes relying on multiple assumptions and subjective judgements to arrive at a Market Value, defined under section 272 TCGA 1992 as the price that the shares might reasonably be expected to fetch on a sale in the open market in an arm’s length transaction.
The HMRC Valuation Process
Although the breadth of Post Transaction Valuation Checks has been reduced in recent years by HMRC’s Shares and Assets Valuation (“SAV”) department, a valuation agreement process still exists for the EMI, SIP, CSOP and SAYE schemes.
Although not required in order to establish the scheme, it is strongly recommended that a valuation be agreed with SAV any time awards are made for peace of mind and reassurance in the event of a look back exercise by HMRC.
Private companies have to undergo a fiscal valuation exercise when making awards of shares or options under a share scheme to determine for tax purposes what the value of those awards would be, hypothetically, if they were to be placed on an open market.
Fiscal valuations are understandably a lengthy and complex process relying on multiple assumptions and the subjective judgements of individuals. There is no one singular way to value a private company and approaches can be more or less suitable depending on the characteristics of the business.
The most popular and well known methodology is the earnings multiple, whereby a company’s EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is calculated and a multiple applied to this figure to reach an Enterprise Value. This Enterprise Value is meant to represent the value of the potential future earnings of the business. It may then be adjusted for cash and debt to reach an Equity Value.
Whilst EBITDA multiples are widely used, they are less suitable for loss-making companies such as Start Ups. For a banking or financial institution a net assets valuation basis may be more appropriate, just as a company with recent fundraising activity would have to factor these real prices paid.
A myriad other factors also inform fiscal valuations: the capital structure, the rights and restrictions of the shares over which awards are being made, any offers made by third parties to purchase the business, and so on.
How Pett Franklin can help
At Pett Franklin we have valuation specialists that have been assessing companies for over a decade. No matter the size, development stage, or niche sector your business operates in, or how complex your capital structure or share scheme rules, we have the experience and expertise needed to provide an independent valuation for your company.
Contact us below to find out more about our valuation services and how we might be able to help you or your client.