How to value small business

[tony84]

Hi,

I am in discussions about someone buying some shares/being given shares in my small business.
There is probably going to be a CGT liability, but how do we work out a value and what to pay? I have spoken to my accountant, but he has said he does not do that and said there is a company he can refer me to but they will charge more than any likely tax liability.

 

[UK Contractor Accountant]

but how do we work out a value

On what a willing buyer is prepared to pay for the shares!

Negotiation

 

[tony84]

What about if we agree to give them the shares?
How do we work out the CGT liability?

 

[brucegreig]

You could use a multiple of profits. A small biz might sell for 3x annual profits, if you are selling the whole thing. You can downrate this value for a minority holding.

Example:
Business has made an average of £100k post-tax profit per year for past few years.
Value at 3x profits = £300k
If you sell 20% of the shares , that's 20% of £300k = £60k

You can further downrate this by, say, 50% because a minority shareholding is intrinsically less valuable than owning all the shares = £30k

For CGT purposes, it is the market value which counts, not the friends-and-family price you actually agreed. So you need to work out what the reasonable market value would have been. You can ask HMRC to agree this valuation using this form:

Post transaction valuation checks for Capital Gains (CG34)

Use this form to get the valuation of an asset checked by the HMRC Shares and Assets Valuations (SAV) team.

www.gov.uk

I have no experience of valuations for CGT purposes, but I have agreed valuations with HMRC for the purposes of share option schemes. In my experience, they are very reasonable and if you pick the lowest number you can reasonably support and provide some calculations, they will sign it off.

 

[HFE Signs]

Example:
Business has made an average of £100k post-tax profit per year for past few years.
Value at 3x profits = £300k
If you sell 20% of the shares , that's 20% of £300k = £60k

3x EBITDA seem a bit on the low side.

I know a company that sold for 10x just before covid, they were able to justify very good growth potential though, sadly with covid it didn't quite go to plan.

The multiplication factor really depends on the past accounts and a good case for growth opportunity, typically 3-8 times EBITDA for a well established business would be considered the normal range.

 

[brucegreig]

3x EBITDA seem a bit on the low side.

I know a company that sold for 10x just before covid, they were able to justify very good growth potential though, sadly with covid it didn't quite go to plan.

The multiplication factor really depends on the past accounts and a good case for growth opportunity, typically 3-8 times EBITDA for a well established business would be considered the normal range.

Yes, agreed.

Higher growth = higher multiple
Predictable, reliable profits = higher multiple

Tesla trades at something like 1,000x earnings, because people think it will grow a lot
Novacyt (covid testing company) less than 1x last time I checked because people think it won't grow at all, and profits very unreliable in future.

(OP presumably wants to get to the lowest reasonable figure that he can justify, to keep CGT liability as low as possible.)

 

[The Byre]

Any company is worth its assets. The assets are the total discounted value you can extract from the company over its lifetime (discounted by inflation, interest rates, future value, alternative opportunities and risks).

The assets include net profits, but also include property such as IP, buildings, machines, vehicles, market share, contracts, etc. The discounting must be carefully done and to current currency values.

A small company MUST be valued with a great deal of skepticism because it is very vulnerable. A company that depends on one person is worth very little if anything at all! Even companies that have 100 employees that I have seen being sold, once the new boys move in, can crash because of staff dissatisfaction with the new management or because the company was just too small.

A small company must also be discounted because valuing a company properly takes a great deal of time and effort and few people know how to do it - so valuations cost money and that cost has to be taken off the value of the company.

So there is no formula for small companies - there can be no formula other than to look at the assets, of which profits are just a single factor. If a company has just a handful of employees but owns a £1m building and is just about breaking even, that company is worth that building.

One factor most aspirant owners fail to account for is the cost of ownership. It costs money to own a company. Those costs include the cost of a decent manager if the company was owner/operator run. They also include the cost of overseeing and controlling the company - once a month or once a week, someone from the parent company has to go through the books and the accounts and check them. For example, stock has to match sales, receivables have to be received - and so on.

 

[UK Contractor Accountant]

So in essence its worth what someone is prepared to pay for it!

All these valuations models for OMB's just dont work. Guide only

 

[HFE Signs]

So in essence its worth what someone is prepared to pay for it!

All these valuations models for OMB's just dont work. Guide only

Like with anything, you work out your asking price and if it sells then someone agrees with you. You can't just pluck a figure out of the air with no substance to it and keep your fingers crossed

 

[tony84]

When it comes to CGT then... What do I tell HMRC?
Basically, I am happy to give someone a 5% shareholding with a view to them building it up over time which might be based on them buying the shares or hitting certain targets - basically TBC.

But I have to pay CGT on the value of these shares... So what do I tell HMRC?

 

[pentel]

You can't just pluck a figure out of the air with no substance to it and keep your fingers crossed

You definitely can, and a lot of businesses listed by agents seem to have used this method of vauation.

When it comes to CGT then... What do I tell HMRC?
Basically, I am happy to give someone a 5% shareholding with a view to them building it up over time which might be based on them buying the shares or hitting certain targets - basically TBC.

But I have to pay CGT on the value of these shares... So what do I tell HMRC?

You need to look at the increase in value. Don't forget you have a CGT allowance every year.

5% of a company can have different values. 5% as the only shareholding is worth a lot less than the 5% which when added to an existing 46% makes the shareholder a majority shareholder.

You definitely need to consult a reputable accountant.

 

[Mark T Jones]

In a small businesses, I'd pretty much ignore any established basis of valuation (with the caveat that it can add credibility if you anchor to something, even tenuously).

What actually matters is the motivations, aims and outcomes for each individual. Which also forms a useful basis for the essential shareholders' agreement.

 

[HFE Signs]

You definitely can, and a lot of businesses listed by agents seem to have used this method of vauation.

Fair enough, my business is worth 50Million then, any buyers?? Thought not

 

[MBE2017]

Fair enough, my business is worth 50Million then, any buyers?? Thought not

Sounds like you over valued it then? The first reply is the correct one in post 2.

 

[simon field]

Mine is worth the proverbial bucket of warm spit!

 

[Bobbo]

When it comes to CGT then... What do I tell HMRC?
Basically, I am happy to give someone a 5% shareholding with a view to them building it up over time which might be based on them buying the shares or hitting certain targets - basically TBC.

But I have to pay CGT on the value of these shares... So what do I tell HMRC?

why would you be giving someone 5% for nothing? what are they bringing to the table? are they (or will they be) an employee of the company?

are you 1) giving them 5% of the 100% shares you currently own, or 2) will the company issue new shares to this person?

 

[tony84]

why would you be giving someone 5% for nothing? what are they bringing to the table? are they (or will they be) an employee of the company?

are you 1) giving them 5% of the 100% shares you currently own, or 2) will the company issue new shares to this person?

I am not giving something for nothing. There are a number of reasons, I am not sure they are entirely relevant?

Does it matter if they get 5 shares of 100 or if I issue another 100 shares and give them 10? (Genuine Q btw).

 

[Financial-Modeller]

What about if we agree to give them the shares?
How do we work out the CGT liability?

At risk of being flippant, if you give someone shares, why would there be a CGT liability? The "G" part would be nil.

If you wanted to offset a loss against other gains, you should probably seek better advice than your accountant can provide you with.

Just give them the shares if that's what you have decided to do.

 

[tony84]

In the same way that if I give someone a house, stamp duty would still potentially be due on the value of the property... So whilst no actual gain, if there is a value CGT would be due?

I dont know, thats why I am asking.

How many times do you read on here people did not pay the tax and have had fines added etc, I am trying to be proactive... My accountant although generally pretty good is standing at arms length with this which makes me more inclined to find out and double check.

 

[UK Contractor Accountant]

So whilst no actual gain, if there is a value CGT would be due?

I dont know, thats why I am asking.

Already answered above in post #4

its MV that applies

 

[Bobbo]

I am not giving something for nothing. There are a number of reasons, I am not sure they are entirely relevant?

Does it matter if they get 5 shares of 100 or if I issue another 100 shares and give them 10? (Genuine Q btw).

The reason they are getting the shares is very relevant to potential tax consequences.

For example, if they are an employee then this may bring the transaction within the Employment-related Securities rules.

As to the second question: if you give/sell them five of your shares, then you are making a disposal of those shares and thus potentially a CGT event for you personally.

If as you suggest, the company issues another 100 shares, 90 to you and 10 to them, then you are not disposing of anything.

The best advice here is to speak with the firm your accountant has suggested referring you to, to fully explore the options available and their consequences.

 

[Truemanbrown]

I would see your accountants urgently on the matter. I would imagine that he would probably go through the following points: -

1. He would require accounts for a number of years. He would not just concentrate on the pandemic years of 2020 and 2021. He would mostly concentrate on the years before the pandemic.
2. He would ask you for one-off transactions which might have inflated the company profits. One example would be the millennium bug where IT consultants were making significant, one-off profits trying to solve the problems. The valuer will discount one-off transactions such as this.
3. If you have not taken a significant salary from your business, then an amendment will be made to include at least the average salary within the amended accounts.
4. The valuer will make a discount to the valuation on the basis that the shares that you give away will not give control of the company to your employees.