Help With Valuation Of Private Company
Discussion
Hello,
My Father in Law sadly passed away recently and was a minority shareholder and director of a small business. His shares have passed to my MIL and the Director of the company has made an offer to buy the shares back.
FIL owned 34 shares from a total of 140 shares, 24.3%
The company accountant has provided two different methods of valuing his shareholding. Column A is based on the average pre-tax profit of the company over the last 5 years, and Column B is the same calculation based on the pre-tax profit from last year alone. The shareholding of 24.3% is a minority shareholding and the value is discounted on a sliding scale of 50%.
I don't have access to the full accounts as they are a small business so don't need to publish them so I'm taking the pre tax profit and adjusted pre tax profit as being correct.
Can anyone suggest any questions to ask? I don't understand the Earning Multiplier. I think this is the P/E ratio but don't know how it has been derived,
The Minority Discount part seems clear.
The last set of accounts show capital and reserves of £162k but I'm not sure if this has any bearing on the value of the shares?
My Father in Law sadly passed away recently and was a minority shareholder and director of a small business. His shares have passed to my MIL and the Director of the company has made an offer to buy the shares back.
FIL owned 34 shares from a total of 140 shares, 24.3%
The company accountant has provided two different methods of valuing his shareholding. Column A is based on the average pre-tax profit of the company over the last 5 years, and Column B is the same calculation based on the pre-tax profit from last year alone. The shareholding of 24.3% is a minority shareholding and the value is discounted on a sliding scale of 50%.
I don't have access to the full accounts as they are a small business so don't need to publish them so I'm taking the pre tax profit and adjusted pre tax profit as being correct.
Can anyone suggest any questions to ask? I don't understand the Earning Multiplier. I think this is the P/E ratio but don't know how it has been derived,
The Minority Discount part seems clear.
The last set of accounts show capital and reserves of £162k but I'm not sure if this has any bearing on the value of the shares?
Yes the 3x is the p/e ratio applied. 3x is often used as a basic low end calculation in these circumstances.
50% is also fairly standard for a minority discount. But is it fair to apply in this instance?
And yes the £162K is important. To put it rather simplistically, your MIL 'owns' 24.3% of those reserves but they may be required for trading purposes (eg fixed assets). So none, part or all of the £162K may need to be considered.
Some quick thoughts:
- You need to see a set of full accounts (including P&L) for the last three years
- An average of the last three years is more standard than the two offered there, but obviously either could make more sense depending on the business
- Why is the pre-tax profit adjusted by £50K? Replacement wages?
- What does the Memorandum and Articles or shareholder agreement say about selling the shares? Does she have to sell? Is there an agreed methodology? Should an independent accountant be involved? Mem and Arts can be download from Companies House: https://www.gov.uk/get-information-about-a-company
- Would a dividend continue to be paid if she didn't sell?
How much have they offered?
I'm happy to have a look at the accounts if you want, because at first glance, those figures appear predatory.
50% is also fairly standard for a minority discount. But is it fair to apply in this instance?
And yes the £162K is important. To put it rather simplistically, your MIL 'owns' 24.3% of those reserves but they may be required for trading purposes (eg fixed assets). So none, part or all of the £162K may need to be considered.
Some quick thoughts:
- You need to see a set of full accounts (including P&L) for the last three years
- An average of the last three years is more standard than the two offered there, but obviously either could make more sense depending on the business
- Why is the pre-tax profit adjusted by £50K? Replacement wages?
- What does the Memorandum and Articles or shareholder agreement say about selling the shares? Does she have to sell? Is there an agreed methodology? Should an independent accountant be involved? Mem and Arts can be download from Companies House: https://www.gov.uk/get-information-about-a-company
- Would a dividend continue to be paid if she didn't sell?
How much have they offered?
I'm happy to have a look at the accounts if you want, because at first glance, those figures appear predatory.
MaxFromage said:
Yes the 3x is the p/e ratio applied. 3x is often used as a basic low end calculation in these circumstances.
50% is also fairly standard for a minority discount. But is it fair to apply in this instance?
And yes the £162K is important. To put it rather simplistically, your MIL 'owns' 24.3% of those reserves but they may be required for trading purposes (eg fixed assets). So none, part or all of the £162K may need to be considered.
Some quick thoughts:
- You need to see a set of full accounts (including P&L) for the last three years
- An average of the last three years is more standard than the two offered there, but obviously either could make more sense depending on the business
- Why is the pre-tax profit adjusted by £50K? Replacement wages?
- What does the Memorandum and Articles or shareholder agreement say about selling the shares? Does she have to sell? Is there an agreed methodology? Should an independent accountant be involved? Mem and Arts can be download from Companies House: https://www.gov.uk/get-information-about-a-company
- Would a dividend continue to be paid if she didn't sell?
How much have they offered?
I'm happy to have a look at the accounts if you want, because at first glance, those figures appear predatory.
Max,50% is also fairly standard for a minority discount. But is it fair to apply in this instance?
And yes the £162K is important. To put it rather simplistically, your MIL 'owns' 24.3% of those reserves but they may be required for trading purposes (eg fixed assets). So none, part or all of the £162K may need to be considered.
Some quick thoughts:
- You need to see a set of full accounts (including P&L) for the last three years
- An average of the last three years is more standard than the two offered there, but obviously either could make more sense depending on the business
- Why is the pre-tax profit adjusted by £50K? Replacement wages?
- What does the Memorandum and Articles or shareholder agreement say about selling the shares? Does she have to sell? Is there an agreed methodology? Should an independent accountant be involved? Mem and Arts can be download from Companies House: https://www.gov.uk/get-information-about-a-company
- Would a dividend continue to be paid if she didn't sell?
How much have they offered?
I'm happy to have a look at the accounts if you want, because at first glance, those figures appear predatory.
Thank you for the detailed reply. I will ask the MIL obtains the full accounts.
"Why is the pre-tax profit adjusted by £50K? Replacement wages?" My FIL took a salary of £50k afaik, would this explain it?
As to whether a dividend would be paid if she decided not to sell is this up to the remaining Director to decide? He could decide only to pay himself a salary then MIL wouldn't receive any future dividend.
£50K of dividends would explain the adjustment. £50K of salary should already be included in the figures.
And yes you are correct regarding the dividends. However this could mean a less tax advantageous drawing of income for the majority shareholder and so it would be worth his while buying the shares back.
And yes you are correct regarding the dividends. However this could mean a less tax advantageous drawing of income for the majority shareholder and so it would be worth his while buying the shares back.
MaxFromage said:
£50K of dividends would explain the adjustment. £50K of salary should already be included in the figures.
And yes you are correct regarding the dividends. However this could mean a less tax advantageous drawing of income for the majority shareholder and so it would be worth his while buying the shares back.
In the last tax year the FIL received a dividend of £14k so another question to the Director is how was the adjusted pre-tax profit calculated.And yes you are correct regarding the dividends. However this could mean a less tax advantageous drawing of income for the majority shareholder and so it would be worth his while buying the shares back.
With the £160k you would remove “working capital” and be entitled to 24% of the balance. There are standard ways to calculate working capital to remove the emotion of it.
If he was paid £50k dividend then that would previously have been retained profits so that adjustment downwards by 50k is taking the mick.
Depending on the business 3x EBITDA is also low top line. I sold my business for 24x EBITDA!
There is also a premium for the existing director getting full control of the business.
I would go to war with them on principle for even offering £10k!
If he was paid £50k dividend then that would previously have been retained profits so that adjustment downwards by 50k is taking the mick.
Depending on the business 3x EBITDA is also low top line. I sold my business for 24x EBITDA!
There is also a premium for the existing director getting full control of the business.
I would go to war with them on principle for even offering £10k!
Edited by dmahon on Tuesday 15th March 13:52
JeffreyD said:
It would be worth checking if there is a shareholder agreement in place - if so there could well be a clause that deals with this scenario.
If there is a clause in the agreement, then it may be in everyone's interests to stick with it. That way, everyone can buy and later sell their shares with the same calculation method. Definitely reduces the uncertainty.brickwall said:
a) The earnings multiplier of 3 is very low. 10x is more typical for stable businesses, and some fast-growing ones in the right sector could be closer to 20x.
b) The 50% ‘minority discount’ is unjustified and arbitrary. One could just as easily argue they should pay a premium to have full ownership.
I'm afraid that's completely wrong for the SME market. I'm an accountant with plenty of experience plus have two very experienced corporate guys I rely on.b) The 50% ‘minority discount’ is unjustified and arbitrary. One could just as easily argue they should pay a premium to have full ownership.
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