Valuation Snapshot - Spring 2017

Spring 2017

Valuation Snapshot

Welcome to our ninth 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.

A softening of prices This latest Snapshot shows a slight decline in the PEMCF index of private company pricing down 1.5% from the September 2016 position.

However for context even with that, it’s 3.25% up on the figure from a year ago.

Once again the three underlying indices have moved differently. This can sometimes be due to the size of transactions reported, PERDa reports much smaller deals with an Enterprise Value of around £20M whilst PCPI reports deals with an average Enterprise Value of around £83M.

Argos reports deals with average Equity Value around £92M at today’s exchange rates. This isn’t a like-for-like comparison but if one assumes that most deals at that level will have some gearing on the balance sheet then probably Argos is reporting bigger deals than PCPI. One might tentatively conclude that at the larger and smaller ends of the scale prices softened slightly this quarter.

Key valuation indices Q4 2007 to Q4 2016

Businesses need valuing for a variety of different reasons At PEM, we can produce valuations for a wide range of purposes. It could be as part of exit strategy planning, for tax purposes, because of shareholder disputes, to implement employee share schemes, probate, due to divorce, or litigation.

A less commonly encountered reason is the requirement in Section 593 of the Companies Act for a quoted company to value an acquisition target where it’s issuing shares as part of the consideration.

Specifically, the requirement is for a valuation by an independent party of the non-cash consideration offered for shares to be allotted in a public company (s.593, Companies Act 2006). A report on the value must be made to the company within six months of the proposed allotment and sent to the proposed allottee (s.593, Companies Act 2006 replaced s.103, Companies Act 1985 on 1 October 2009).

Our recent s.593 experience PEM Corporate Finance was recently engaged to provide such an opinion in connection with the acquisition by AIM-listed RhythmOne plc of the Canadian company Perk Inc. RhythmOne is a technology-enabled digital media company that connects online audiences with brands through premium content across devices. In the $42M all stock transaction, RhythmOne acquired Perk which operates mobile apps which let members earn “Perk Points” through

activities including shopping, watching videos and playing social games.

Whilst most of the business of both companies is based in North America, the Cambridge connection is that RhythmOne, which was originally called Blinkx, was demerged from Cambridge-based Autonomy and listed on AIM.

Acquisition of Perk Inc by RhythmOne plc

We were delighted to work on this assignment and delivered the report to a tight schedule over the Christmas period to meet with timetable requirements of the transaction.

Lake Falconer lake@pemcf.com

The value of Post Transaction Valuation Checks deemed negligible

by HMRC The Government remains keen to encourage greater employee participation in their employer companies given the benefits that employee engagement delivers – from increased productivity, reduced absenteeism and increased resilience in an uncertain economic environment.

Providing certainty

post-acquisition with HMRC under a Post Transaction Valuation Check (PTVC) albeit this process could take upwards of three months to complete.

Citing severely stretched resources and overly complex valuation scenarios being presented to them, HMRC removed the PTVC facility on 31 March 2016.

Where shares are delivered to employees via an HM Revenue & Customs approved scheme (such as Enterprise Management Incentives, Company Share Option Plan or a Share Incentive Plan), one can agree the market value of the shares to be used under such arrangement with HMRC before the option is granted or share award made. This provides certainty to all parties as to future tax and National Insurance treatment.

Consequently, we are now in an era under which tax returns will be submitted to HMRC reporting non-qualifying share acquisitions that incorporates values that have not been agreed with HMRC. These returns are therefore open to greater scrutiny and enquiry particularly if values returned by the employee and their employer company do not match!

Where shares are delivered outside of an HMRC approved scheme – for example, a straight award of shares or the exercise of an unapproved share option - income tax (and possibly National Insurance) will be due on the difference between the acquisition price and the market value at the date of acquisition.

Where HMRC dispute any share valuation offered by the taxpayer, HMRC should not have the benefit of hindsight in determining a historic value. Where significant events have happened in the company post-acquisition – sale, listing, funding round etc - such events may guide HMRC’s view.

Until March 2016, it was possible to formally agree the market value for such acquisitions

It is therefore vital to keep contemporaneous evidence supporting the market value as reported, particularly noting the level and quality of information that would have been available to the employee at the time of acquisition.

Matthew Eady meady@pem.co.uk

Historic value

pemcf.com/valuations

PEM Valuations From time to time, your clients may ask you how to value their business. Such requests could be triggered by: ▪▪ ▪▪ ▪▪ ▪▪ ▪▪ ▪▪

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.