Keeping valuations regular

February 13, 2024

When it’s easy to find out the value of a house by tapping on an app, why are investors happy to accept quarterly or irregular valuations for their private company shares?

As we crack on with the regular annual valuations clients ask us to perform at this time of year on top of the one-off valuations that we are undertaking, we have also had an unusual request.  A client has asked us to provide a monthly valuation of their company so that the board can form a view on the optimal time to start a fundraise.  This client wants to be on top of the issue, so that it will have the whip hand with investors when the time comes.

Soon, we will have some more news on how we are going to improve the ease of getting a regular valuation.  We are just doing our final tests, but once we are happy that our solution works EVERY TIME, we will tell you a bit more.

It’s not unusual for us to be asked to undertake a retrospective valuation on share option schemes in particular because at the time of issuance the company did not pay much attention to whether the valuation was correct.  With hindsight the board realises that the paperwork needs to be tidied up to make sure that a trade buyer or HMRC does not make a fuss down the line.  Another common request is to provide valuations for probate.

With the volatility in valuations in recent years, the task is not typically simple.  We take extra care to get it right.

Whilst HMRC is what people are typically most aware of in terms of risk that a valuation will be challenged, sometimes the more significant risk is if a disgruntled employee or heir comes to the suspicion a valuation was not accurate and they have been disadvantaged.  That’s when things can start to get nasty.

In a world where most of us can find out the current price of a house or flat by tapping on an app, its slightly surprising that shareholders are not that bothered about having ready access to an accurate and current value of the private company shares they own.  Early-stage investors often say that it only matters when an exit comes around.  Institutional investors are inured to quarterly valuation reports.

We think differently.  It’s when I am chatting with angel investors about what will happen to their portfolios during probate, that the penny drops.  I ask them whether their executors and heirs will be able to understand what the value of their private company portfolio is worth on the date of death.

The usual response is a rather worried expression as they realise that the paperwork they hold possibly only states the price at which they invested and there is a real chance that the executors might rely on the numbers on the spreadsheet.

The problems, delays and costs (!) that could arise during probate if the valuations are not up to date are well known to probate administrators.

But what the angel investors really dislike is the risk that the executors or even the heirs may inadvertently sell the shareholdings at below value, to a savvy fellow shareholder who “to help out the widow/er” offers to “simplify probate” by buying the shares off the estate during probate at or around the price paid when the angel invested!

If company directors are not getting increasingly concerned about disgruntled employees bringing a claim one day around the share option scheme valuations, they should be.  Trade buyers are already well aware of the opportunity to use poor paperwork around the share option scheme valuations to chip the price at the last minute.

Once a valuation has been prepared it’s not hard to keep it up to date. In fact the more regularly it is calculated the easier it is to do.

If you have any clients whom you think would benefit from getting an up-to-date valuation of shares in a private company, just let us know.  Being proactive on this issue, can help corporate actions proceed more smoothly once they start.

Do call us anytime if your client has a valuation need, whether its tricky, needed fast or just needed for reassurance.

You can reach me anytime at modwenna.rees-mogg@athlacapitalmanagement.com or on 07736 676212.