Summer 2016
Valuation Snapshot
Welcome to our seventh 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.
Key valuation indices to Q1 2016 The indices for this latest period show a slight drift upwards continuing the trend, but prices have been pretty stable over the past year. What’s of interest now is what these figures don’t show – the effect, if any, of Brexit. Anecdotally I would say that in the short-term it is having a positive effect due to a cheaper pound. We have a number of transactions where the overseas buyer is benefitting from the effect of exchange rates. And hot off the press at the time of writing, Softbank is acquiring Cambridge-based
ARM. They should benefit from the c20% fall in the pound versus the yen (equivalent to c$5Bn on this transaction) although much of the gain is needed to offset the rise in ARM’s share price post-Brexit. It would be rash however to assume that there won’t be downward pressure on multiples paid for SMEs if UK growth stagnates due to the ongoing uncertainty. Our next review of prices in the autumn will be very interesting.
What’s more difficult than valuing “Stairway to Heaven”? At number 31 in Rolling Stone magazine’s list of “The 500 Greatest Songs of All Time”, Led Zeppelin’s 1971 “Stairway to Heaven” has earned c$60M in royalties to date. So clearly a valuable property. So much so that in a recent US lawsuit it was alleged that Led Zeppelin stole the opening riff from a 1967 song titled “Taurus” by the band Spirit. The jury sided with Led Zeppelin and found that there was no infringement. The case does give some interesting insights into how such intangible assets can be valued.
How do you value it? The apportioning of value in songs is tricky because songs may have similar themes. There are after all only 13 notes in western music. Carving up the value of Stairway to Heaven would be more difficult because it’s something of an epic piece. In true ‘prog rock’ style it is eight minutes long, but the value might not be linear over that time. The easiest method might be to allocate the duration of the accused portion of the song to its total length to arrive at a percentage – so if 60 seconds of a 3-minute song had been plagiarised the apportionment of value would be one third. But what if Jimmy Page’s guitar solo was where the real worth and emotional impact of the song lies rather than the intro? Commenting on the Led Zep case, Michael Pellegrino of US based IP valuation experts Pellegrino & Associates reckons that it depends on context
and perspective. While that’s true I suspect it would be difficult to support an argument other than time-based apportionment – anything else would be too subjective.
Our recent experience Of course, it’s much easier to value the entire song, or any other intangible, based on its earnings potential. We recently valued some publishing rights – and the value was derived from the forecast earnings from the rights over the period during which royalties would persist, taking account of a decline as the content dated. This was relatively straightforward to assess for a series of academic works in an established field. But a song would be more difficult because arguably its earnings potential is high in the initial years and then declines steeply unless you are lucky enough to have written a classic. Not unlike some of the thinking in the article on valuing the Star Wars franchise in the last edition of our Valuation Snapshot. Consensus opinion seems to be that the song is worth c$600M. What’s more difficult than valuing it is working out what the song is all about!
Lake Falconer lake@pemcf.com
Planning for the future: could a valuation help save tax? Businesses don’t run themselves and so for some business owners the need for a valuation may only become a priority when considering an exit strategy. But the chance to save some tax is always attractive, and using a professional valuation can really help back up tax planning at any stage in the life of a business. Below are just a few examples.
Use of trusts Trusts can be an extremely flexible way of inter-generational planning. There are a variety of structures available which can offer tax-efficient income redistribution to family members and help ensure protection and succession of assets, including shares in small and medium sized companies. A taxpayer may want to place shares with a relatively high value into their trust in order to maximise the tax advantages, so a detailed valuation will ensure that the transaction does not exceed the nil rate band (currently £325,000) in order to avoid an immediate inheritance tax liability. This valuation can then be re-visited at least every 10 years during the life of the trust to help with the ongoing effective trust tax planning and compliance.
Capital gains tax planning Even outside of a trust, valuations play a key part in supporting claims for valuable tax reliefs. For example, where shares are eligible for Entrepreneurs’ Relief any capital gain on the sale or gift of the shares is charged at only 10% (which would otherwise be 20% for a higher or additional rate taxpayer). Holdover relief allows capital gains tax to
Fiona Walker fwalker@pem.co.uk
be deferred on the gift of business assets (such as unquoted trading company shares) with tax only payable on any future sale. As you might expect, in order to benefit from these reliefs various conditions need to be met. For instance, no more than 20% of a company’s activities or capital assets can relate to non-trading/investment activities. The company accounts will reflect assets based on a variety of accounting policies and so a valuation may be needed to prove eligibility of any relief.
Valuations play a key part in supporting claims for valuable tax reliefs
Inheritance tax savings Business Property Relief is an inheritance tax relief which can reduce the charge on qualifying assets by 50% or 100%. Again valuations are commonly called upon to show that the company meets a requirement that it is mainly a trading company (in this case 51%). Where Business Property Relief is not fully available a valuation will also be needed when a business owner passes away in order to accurately prepare the inheritance tax return, and in some cases to negotiate a more favourable valuation with HMRC, especially where a minority shareholding is involved. If you’d like to find out more about tax planning and valuations, please get in touch with me or the PEM Valuations team.
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 advisors, 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.