Practical difficulties with share plan valuations during Covid-19

There is a strong argument for issuing shares to employees or granting them share options during the current Covid-19 pandemic, as the value of shares may be relatively low. However, there are practical difficulties regarding share valuation to consider.

For tax-advantaged share plans, the valuation methodology HMRC would most commonly expect to see would be a “weighted average profits” approach. This approach involves working out a figure that represents a weighted average profit/earnings figure which is likely to be sustainable in the future.

Then a multiple is applied to this figure (likely a price/earnings (PE) multiple) to establish (in simple terms) the market value of the company. Any applicable discounts (which could include inter alia limited marketability of the shares and which can be considerable for minority interests in small private companies) are applied to this figure. Broadly speaking, the resultant number is then divided by the share capital to reach a market value figure “per share”, for tax purposes.



Unfortunately, it is more troublesome to ascertain what multiple should be used at this time. Other M&A deals involving similar companies are arguably a source of data. However, there has been a disruption in the number of deals taking place. So, less empirical data to use.

In addition, one might well ask questions about the suitability of that data. In these unprecedented times, some sales/deals might well be distressed or the sellers have liquidity issues and are in a weak position to negotiate.

Multiples derived from share prices of quoted companies would be another reservoir of information to inform multiples for smaller private companies. However, these listed shares seem to be highly volatile at the moment and how reliable in reality are the short-term forecasts provided by such listed companies (especially where no guidance has been provided) in any event? This is especially the case as historic information has become quickly “out of date” due to its pre-pandemic time period.



Treating Covid-19 as an exceptional item and using a multiple based on a pre-lockdown world would likely be overvaluing a business, as it is effectively ignoring the pandemic.

However, companies being valued may well expect to return to prior profitability levels within a relatively short time period.
Therefore one might argue that the valuation can be based on largely historic profit figures (which published financial statements will be due to the general delay in publishing annual financial statements). However, so that Covid-19 is to some extent taken into consideration, a multiple is applied which does factor in a “Covid-19 effect”.

As tax-advantaged options and shares are usually granted over small minority interests, it is a common assumption that the information required to inform the valuation is restricted to the published information only. This assumption could not be applied to Growth Shares in an EMI wrapper but they are a much more bespoke offering and rather outside the scope of this blog.

In conclusion, ultimately the financial pandemic (and its possible financial impact) is a matter that needs to be considered on a case-by-case basis involving clear understanding of the company’s financial performance.


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