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Valuation of shares question

Hello fellow accountants,

I've just read a recent article in Indicator about turning a lease into a tax-allowable loss by transferring the lease into a company and basing the value of the shares on the remaining value of the lease.

Good stuff and I've researched it to death. Fantastic little tax planning tool.

However, what I am not clear on is the mechanics of valuing shares. Would somebody mind briefly explaining how this is done and what sort of relevant yearly working papers would need to be drafted along with any relevant companies house forms? Sorry to ask so much but I am genuinely interested. In my defense I'm only 24 and still learning!

Many thanks.

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Indicator

I haven't read that article, so I'm not sure what is proposed. But as a word of caution, the suggestions in that publication are sometimes flawed, and can overlook other implications of their 'solutions'. In one recent article, where they were proposing a change of year end to deal with the reducing Annual Investment Allowance, following their advice would actually have increased, rather than reduce, immediate tax liabilities.

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Indeed

Thanks BKD - you're right, I recall finding this out with a VAT article last year. That's why I always research and reaffirm the guidance which is usually very good.

In terms of a general share measurement for a private limited company - any advice would be sincerely appreciated.

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Private limited share valuation

mrboroaccountant wrote:

In terms of a general share measurement for a private limited company - any advice would be sincerely appreciated.

See that piece of string in your pocket?

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Ah.....

BKD wrote:

mrboroaccountant wrote:

In terms of a general share measurement for a private limited company - any advice would be sincerely appreciated.

See that piece of string in your pocket?

 

Ah....

Surely for capital gains purposes however there must be documentation of the underlying assets which the shares value is representative of?

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... ha

mrboroaccountant wrote:

Ah....

Surely for capital gains purposes however there must be documentation of the underlying assets which the shares value is representative of?

Yes, valuation of underlying assets can be used as a basis for valuing a company's shares. But it is only one method - there are several that can be used. To be frank, you would be better looking for a book on the subject.

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Thanks

Again, many thanks BKD for taking the time to respond. You're right... back to books for me - I sometimes read about a particular scheme and get ahead of myself.

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Hypothetically speaking

The value of a share is the net present value of the future income stream (dividends plus eventual sales value) from that share.

Similarly, a business is worth the net present value of its future income stream.

You need to complement your piece of string with a crystal ball.

When you read the book, you will see that valuation is an art, rather than a science.

Broadly speaking though, there are only two times when an asset based valuation is appropriate:

when the earnings potential available from employing the assets is less than their resale value (ie a break up situation); andwhere the earnings potential of the asset is reflected in the resale value of the asset - such as real property.

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Science & Art

For really good guides on what's involved in valuing shares & businesses have a look at various factsheets the ACCA issued about a year ago on this link.

You can gather facts & figures and use a scientific approach to a good deal of it, ie to get you to perhaps 2 or three answers and only then does experience, art or the piece of string come into play.  To do it properly though you really do have to know the business as it is and as it might be, which can mean some research into specfic business sectors.

If you do end up looking at assets whether, as option 1 or to back up another preferred method (eg mainatiable profits after tax times x) and it includes something like the the future value of a lease, then you will need a formal valuation from an expert.

For most accountants this is now probably one of the only areas where we can summon up what is left of the imagination we started with and so don't be put off.  What I did on my first one was to do lots of work first to get to what I thought was a good range, then paid another accountant who had lots of experience to check it over, it was an hour's fee well spent.

 

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