There are many occasions when the shares of an unquoted company need to be valued. These include deferred consideration, company restructurings and the issue of shares or options under employee share schemes. In many cases the value will need to be agreed with HM Revenue & Customs for tax purposes.
Depending on the circumstances, share valuation proposals are submitted to HMRC's Shares and Assets Valuation (SAV) or to a special team such as for post transaction valuation checks. SAV will agree values in advance of certain events, such as the issue of share awards under statutory employee share schemes. In most other cases SAV will negotiate only after the transaction has occurred, which can produce real uncertainty.
Quoted vs. Unquoted
Where a company is listed on the London Stock exchange or similar overseas market, the value of the shares is easy to ascertain. Where a company is quoted but not listed, for example on the Alternative Investment Market, SAV will normally accept a price at or close to the quoted price as "fair value", although they may seek adjustments in respect of any perceived distortions to the market.
For unquoted shares, SAV valuers will seek to negotiate "fair value" based on any recent share transactions or otherwise on sustainable earnings, net assets or dividend yield.. By far the most common basis is sustainable earnings - the level of earnings after tax and minority interests which represents the true economic profit of a business, excluding exceptional and extraneous factors. The value of the share is calculated by multiplying the earnings by a factor known as the price earnings ("p/e") ratio.
The p/e ratio is initially assessed by reference to the price earnings ratio of comparable quoted companies. Where no comparable companies exist, a broader sector or market index may be used, such as the FT-Actuaries series published in the Financial Times. However, SAV accepts that unquoted shares should normally be valued at a large discount to quoted comparables, in the range of 60 to 80 per cent, because of lack of marketability. Additional adjustments may be required if the shares have restricted rights (for example if they are non-voting, or if employee shareholders are required to sell on leaving employment).
The valuation of shares used for an employee scheme may therefore be very low in relation to the value of the company as a whole. It is important that this is carefully explained to employees, so that they understand the potential upside if the company is sold or floated. Low valuations also make it possible for companies to offer larger numbers of shares within the limits that apply all the statutory schemes.
Information requirements: In order to negotiate a value, SAV will generally require at least three years historical accounts, current year management accounts, and any estimates or forecasts adopted by the Board. They will also require a copy of the articles of association and full details of all resolutions affecting the capital structure, dividends paid and past transactions in the shares.
Factors that are not in the public domain, such as unannounced take-over talks, are not normally taken into account in assessing fair value.
Employee Share Schemes
SAV valuers give special priority to HMRC approved employee share schemes. For example, they will normally reply to submissions for Enterprise Management Incentive (EMI) share options within two to three weeks, and sometimes more quickly. Once a valuation has been submitted in writing, negotiations can often be conducted over the telephone. Valuations are normally valid for 60 days or, in the case of a Share Incentive Plan (SIP) usually 6 months, as long as there are no material changes in the commercial or financial position of the company.
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