New Opportunities For Lawyers
May 23, 2023
With the concerns around VC fundraising threatening to spread into the angel world, the need for valuations is now emerging in new and exciting places.
One area is the where the more forward-thinking investors are taking advantage of the opportunity to use the cash they have held back to buy out minority investors who have either lost interest in or who want to get out (perhaps at any price) of a holding they only think will reduce further in value.
In the scenarios like this where we have been doing work recently, the key is to generate a valuation that is acceptable to both sides from day one.
With such transactions no-one wants an extended and acrimonious negotiation…
A comprehensive valuation report that balances the interests of both parties and crucially explains WHY the valuation is what it is, as well as covering all bases including a discussion of where value has been hidden or died makes it much easier for the deal to be done.
When the other party wants to attack the valuation (even if only to make a point) there are two main areas they focus on.
The first is the underlying numbers: it pays to use board-approved forecasts and not to let the valuer play around with the forecasts they use for the valuation as this just creates room for objections!
The other area of focus tends to be the methodologies.
As well as choosing the best methodology/ies, it pays to make sure the report either explains thoroughly why some methodologies are being disregarded and/or to show the results from using the other methodologies and making it obvious why they are not right.
There’s more we can explain about this scenario and how to get a speedy resolution. (Do give me a call on 07736 676 212 if you would like to discuss.)
Another area where valuations are critical, but uncorrelated to the VC world, is the area of share transfers in private companies.
It could be a founder looking to retire and hand the business to staff or a family looking to rearrange its affairs to get wealth down to the next generation.
Only someone inhuman would ignore the sensitivities here.
The valuation must not only give a valuation today so the transaction can take place, but should also be mindful of how the valuation might look some year’s later when a life event takes place and a family looks to assess what went on in the past.
A good example is a situation where a founder transfers shares today, but sadly dies five years’ later.
When probate comes along and the heirs look to see who gets what, they will inevitably review the transfer completed today and have a think about whether there might be an angle.
This will be especially pertinent when the underlying business has thrived in the intervening period and with the benefit of hindsight it could look like the recipient got a bargain.
When we are working on such reports we always make sure that the evidence is rock solid and the arguments are made. We can even comment on how the value might change over time.
If you are thinking about how to generate some business from your clients, it may be worth having a chat with those that have EIS and SEIS investments.
For those that are not performing, it could be well worth their while considering making use of Loss Relief by declaring the value of the investment at nil to HMRC.
Then Loss Relief can be claimed and whilst this removes those shares from the tax wrapper were a capital gain to be generated on an exit later, at least there would be cash to pay the CGT liability.
Few angels know about this but it is very valuable and will generate a cheque from HMRC in the client’s favour.
Of course, being able to prove nil value is not always simple. If the business is barely trading it may be possible just to write to the taxman and declare nil value, but the devil is in the detail and that is where an independent valuation report will make all the difference.
It would probably be a good idea to see if another shareholder wants to buy them (see above!) but that removes the opportunity to benefit if things do turn around. It’s far better to retain title of the shares just in case.
Do call us if you want to find out more about any of these scenarios. Although the economy is performing better than expected and I think we all hope that inflation is going to start heading south rapidly, it never hurts to generate some cash for other investments or even other needs if you can.
