Does tax matter in valuations?

June 14, 2023

Greetings from sunny Bahrain where I’m away on business this week…

The issue around company valuations is just as relevant here as in the UK, although with taxes so low, companies tend to keep more of their cash and can use their profits to invest in growth.

Bahrain has a 10% VAT, there is no income tax and the government is in the midst of introducing a company profits tax.

Does tax matter in valuations? Yes most certainly.

Sales taxes have an impact on consumer sales, though here in Bahrain sales tax is unlikely to dampen spending! The 20% VAT in the UK is more relevant, with B2C businesses most impacted.

You will have read about the desires of companies that sell to tourists to revert to the old regime where tourists could reclaim UK VAT.

Taxes on businesses do make a large difference to valuations.

In the UK, employer taxes such as employer national insurance contributions, depress taxable profits. Corporation Tax depresses post tax profits.

The recent rise in the latter from 19% to 26%, a 36.8% increase, for companies that cannot take advantage of capital allowances or R&D Tax Credits is very meaningful.

Tax is not just a profit issue, it is a cashflow issue as Corporation Tax falls due annually on smaller companies and VAT is paid quarterly in arrears. So we look very carefully at that issue when preparing discounted cash flow valuations, bearing in mind that cash on deposit can now generate an income stream (taxable of course!) of several % points.

Those of you who are familiar with privately owned companies will be aware that if the business is owned by just a few people (perhaps a couple of founders or a family), tax planning around a company tends to be integrated into the planning for the individuals who control it.

With the increase in pension contributions that are now available, we are anticipating that many private companies will start increasing employers contributions to the pension funds of directors and other key employees.  This will have the effect of reducing profits and therefore taxes due on those profits.

For profitable companies that can pay dividends, many advisers are looking closely at whether it is better to distribute dividends or draw salary. It will all depend on the personal tax position of the individuals.

I often noodle the issue of whether it will one day be possible to standardise private company valuations, but this issue alone demonstrates that creating the financial inputs for the valuation exercise is not simple.

If you are trying to prepare forecasts when tax rules change from year to year, it means even greater attention needs to be paid.

And that is before we start thinking about macro factors. What inflation figure should be used – core inflation, headline inflation, CPI RPI??

What is happening with sector multiples, at a time when the VC valuations issues has not been a one off shock but is proving to be a long slow car crash?

I am often asked why we can be so fast and charge so much less than others, whilst still generating reports where clients are delighted AND the quality is (we are told) at least equivalent to that produced by a Big Four valuation team.

The reason is simple.

All we do is think about these issues all day every day.

We keep the data at our fingertips so it is on hand immediately we need it. And we have a standard approach to each valuation which has straightforward logical steps so we do not have to reinvent the wheel each time we start.

We do lots of the same types of valuation – growth share valuations are particularly popular as are valuations where minority share holdings need to be transferred.

Of course we can handle unique situations too, such as transfer of IP assets into and out of companies and trusts.

Why not give us a try? 

The first step is just to email us asking for a quote and then have a 10-15 minute call, so we send you back a really accurate scope and quote within 24 hours..

We are told that we are typically quoting 50%-70% lower than others.

Would it not be a good idea to give yourselves and your clients another choice for a valuation, when there is such a large price differential?

If your need is urgent, I can confirm we will not charge more to do a speedy job! 😉