A business trading as a partnership for a number of years incorporates. Goodwill has been valued at say £500k which is deemed to be a fair value and amounts credited to DLA.
In the next 3 years company has consistent profits which are taken as dividends leaving very little in reserves.
Now, director/shareholder A wants out. He has a DLA being the balance in incorporating plus undrawn dividends.
If someone were to buy those shares, is the value literally the nominal value (assuming zero retained profits) say £1 per share? Assuming no uplift in goodwill valuation since incorporating.
If goodwill has gone up, say to £750k, then the shares price would be £1 plus the uplift in goodwill?
Does that sound right!!?
Replies (12)
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Depends on who's asking
How many shares are being sold? Assuming the usual nominal amount on incorporation, if you were offering them to me at a price calculated as above I'd probably snap them up. If I were the seller, though, I'd be having serious words with the adviser that told me to value them like that.
Incorrect
If profits have continued to rise the goodwill and value of shares will have increased. You need to get your head around the fact that it is two seperate entities the limited company and the shareholder. I find this difficult and the shareholder/directors will find it mind boggling.
The value of the individual shares will be the increased goodwill plus net assets divided by the number of shares.
You need to work out a package as to who is going to own the shares if the other director he will have to find the money not the company.
All other taxes need to be considered such as capital gains tax.
Hopefully a share holder agreement was in place from day 1.
They're not getting anything twice
When they're selling their shares they're not only selling what they've got now, they're also selling their right to share in future profits. What seems to be overlooked is that there are many ways of valuing a company - with a profitable trading company that has a history of paying dividends it would be quite unusual - some would say unwise - to try and value it based on net assets alone.
You could argue anything you want
The stance you will take will depend on whether you are acting for Seller or Purchaser.
What percentage shareholding?
You cannot possibly value a shareholding without knowing this. It sounds also like a connected persons transaction so for CGT you will need open market value regardless of actual price paid.
Advising on a value to be paid on a real sale is risky. Does your PI cover you for this?
In which case ...
... your best advice to the relative would be to seek professional advice.
Even acting pro bono...
Can put you at risk of sued. You say you are not giving professional advice but you clearly intending to express a view on the share value.
I'm with BKD on this. Keep out of it and send the relative to seek advice elsewhere.