Valuation Snapshot Autumn 2018
Welcome to the latest 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.
No sign of Brexit jitters Our valuation index is up 4% since March. As is so often the case, the constituent indices don’t all move in the same direction with PERDa showing an 8% downturn while the PCPI and the Argos MidMarket are up 13% and 4% respectively. Given the scale of the transactions covered in each index this
Key valuation indices Q2 2008 to Q2 2018
probably reflects growth in valuations for larger businesses but some softness at the lower end of the scale. No sign of any Brexit effect to date, which is probably down to the continuing strong supply of strategic buyers and liquidity in the M&A market.
Reasons for differences in expert opinions Two experts can arrive at valuations of a business. As experts aren’t in the business of advocacy, shouldn’t two trained and experienced professionals come up with the same answer? Here’s some good reasons why expert opinions might differ.
Legal guidance Experts can be reacting to different legal guidance.
Different judgements, assumptions
The expert must make assumptions and judgements on a wide range of issues: ▪▪ ▪▪
Differences in availability of information
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Access to data may be unequal. Valuers can only conclude based on the available evidence.
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Access to Management Sometimes the valuer for one “side” in the case is denied the level of access to management granted to the other expert.
Using different valuation methods Valuers make judgements as to which of the three main valuation methods to use. ▪▪ ▪▪ ▪▪
The asset approach is usually of limited use for profitable operating companies The market approach is powerful but comparable companies and transactions need to be selected carefully The income approach has much more subjectivity around future cash flows (especially the terminal value) and appropriate levels of discount
Judgements around these choices hugely influence the valuation opinion. Valuers need to be aware of their merits and disadvantages.
different
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Asset methods - what basis to value the assets? Earnings methods - how to adjust and analyse the cash flows. Some element of judging the future from the past is required Forecast assumptions for Discounted Case Flow - each difference of judgement shifts the result Public company and sector comparables - are the selected companies sufficiently comparable to reach a meaningful conclusion? Premia and discounts - i.e. for control or minority holdings; are they defensible? Weightings assigned to the different methods - are they reasonable?
Mistakes One would hope they’ll be discovered and corrected before anyone ends up before a Judge.
What else might influence the court? The court may also be swayed by the relative credibility of the reports and the testimonies of the experts. Also, how compelling the conclusion is in comparison with other evidence?
Lake Falconer lake@pemcf.com
Tax and the need for business valuations Throughout the lifecycle of an incorporated business, there are many times where a business valuation is essential for tax purposes. The importance of well-reasoned business valuations can’t be underestimated, as shown by the following examples: Where a start-up company is looking for investment, due to the extremely favourable tax incentives available for potential investors, the use of the Seed Enterprise Investment Scheme (SEIS) and/or Enterprise Investment Scheme (EIS) will usually be explored. The business valuations used to set the subscription price for shares issued under SEIS/EIS will be essential for the following reasons: ▪▪
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Understanding how many shares can be issued under SEIS, which delivers 50% income tax relief, before then needing to issue shares under EIS, with only 30% income tax relief; The business valuation/subscription price must withstand HMRC scrutiny in order for investors to get these valuable tax reliefs, and; Valuations agreed with HMRC might also set a precedent for subsequent fundraising rounds
Share options are often used where companies want to tie in and incentivise key employees. From a tax perspective the first option would be to check whether the Enterprise Management Incentive (EMI) scheme is available to the company. If an EMI scheme can be used, valuations (including consideration of the all-important minority discount)
are essential for obtaining clearance with HMRC. More importantly they also set the subscription price at a level which actually incentivises employees to stay and grow the business. A further valuation may be needed when employees actually get their shares under the EMI scheme, as the company might be able to take a corporation tax deduction for the difference between the market value of those shares on that date and the subscription price used for the EMI scheme. Carrying on the example, the company goes on to prosper for many years but one of the director-shareholders then decides to call it a day. Most probably, the use of a ‘company purchase of own shares’ will be promoted to use cash retained by the company to purchase the shares owned by the departing directorshareholder. In this case, not only will the proposed valuation be used to obtain clearance from HMRC, the valuation will be essential in ensuring that the legal requirements under the Companies Act legislation are met. Hopefully the above has helped highlight the need for business valuations, and how vitally important they are for tax. As such, always ask the experts!
Ryan Burford rburford@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: ▪▪ ▪▪ ▪▪ ▪▪ ▪▪ ▪▪ ▪▪
Divorce 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.