A company valuation is a good place to start

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Published: 19 Feb 2018

When looking to sell your company or shares within it, a company valuation is a great place to start. But, the 'desirability' or 'deal clincher' may not only be in the numbers!

Information required to prepare a valuation

When instructed to prepare a company valuation, I usually ask for the following:

  1. Last three years accounts
  2. The company rule book (the articles of association)
  3. A shareholders agreement (if there is one)
  4. Director and / or shareholder details.

From this, a valuation report is prepared showing the results for the last three years and latest financial position. The valuation report should be supported by current year’s results and any forecasts.

It's not only the numbers

However, this is just the starting point for the parties involved. For instance, the reason for the report and for whom it is intended affects the nature of the report and the information included. This in turn can affect the valuation.

There is no 'right answer' or 'wrong answer' to a company valuation.

The valuer sets out the basis of valuation which is open to comment, favourable or otherwise, by the parties involved. Such comment may be coloured by the needs of the parties concerned.

Example 1

For instance, imagne the seller needs a minimum sale price of £X in order to satisfy his post retirement lifestyle, but on the other hand the buyer cannot afford to pay more than £Y for the company. So for a successful deal there have to be compromises on the way and an independent valuation is a good way to start that negotiation.

Example 2

As a further example, if you have, say, three shareholders or directors owning 33.3% each in a company and one of them wishes to retire, what value would you place on that third share? Would it be 1/3 of the total value of the company?

That seems fair, if the share interest is paid by a new incoming director or shareholder.

But if the only bidders are the two remaining shareholders, either of them could end up with voting control of the company.

Would that not put a premium on the price of that shareholding?

To compensate for this the minority shareholder could be rewarded in a number of ways, depending on the circumstances. For instance, a higher salary or pension provision or a director’s service contract, with additional benefits, or a class of shares with preferential dividends could be awarded to the minority shareholder or director.

All of this would need to be taken into account in the valuation of the company for the outgoing shareholder.

Whatever form the negotiation takes, a share valuation is a good starting point.

To discuss this and any other matters that you may have on share valuation contact David Cane on 0330 122 8450 or 07749 080 806. Or email [email protected].