Valuations for share scheme purposes

From greater productivity to reduced absenteeism, employee share ownership can bring many benefits to businesses, and in turn the economy. In the past few years, the
government has focused on encouraging employee participation through a number of changes to tax legislation.

Consequently, many more companies are now introducing share option schemes. Particularly popular are schemes whereby employees acquire shares only if their employing company is sold. There has also been a shift of opinion in favour of the previously maligned Employee Shareholder Status (or the “Shares for Rights” scheme).

Since unlisted companies have no trading arrangements in place for their shares, it is important to consider a valuation before putting a share scheme in place – and furthermore, to attain agreement on such values from HMRC. There are subtle, yet important differences in method when valuing for share scheme purposes (as opposed to valuing for business sale or buyout).

The general principle applied is “what price would a willing third party be prepared to pay for a share from a willing seller?” The level of information available to our “willing third
party purchaser” depends on the nature and cost of the investment and the size and influence of the holding acquired. For example, our willing third party acquiring less than 25% of the company’s voting capital can generally expect to see only that information on the company that is available on public record (statutory accounts, Companies House
returns).

Such restricted information can often lead to HMRC considering that a plain-vanilla earnings basis valuation model as being appropriate but this is often subject to much debate!

If you’d like an informal chat about valuing your business, over the phone or a cup of coffee, please get in touch.