Value of shares?!

Value of shares?!

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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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By User deleted
19th May 2014 19:19

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.

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By Tosie
19th May 2014 19:54

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.

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By bus1ptk
19th May 2014 20:23

Thanks guys.

So on paper, in very basic terms the balance sheet consists of:

Goodwill £500k
Cash in hand £100
Less DLA of £500k

Represented by:
Share capital of £100

Assuming the goodwill was at fair value and you couldn't achieve a higher value, then surely the shares are only £1 each but theres a balance payable as DLA, on the grounds that on incorporating, the shareholders already had their share of the £500k (albeit as a loan). Any price in excess of £1 means they're getting it twice?

If goodwill was revalued to say £750k, then the shares would be worth £1 each plus £2,500 being uplift in goodwill....

Does that make sense?

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By User deleted
19th May 2014 20:33

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.

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By bus1ptk
19th May 2014 20:46

Agreed. Could the argument not be made that if goodwill was fairly/independently valued, this would take into account future maintainable profits in it valuation.

The business in question has steady turnover of £500k and steady distributed profits of £150k pa.

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By User deleted
19th May 2014 21:12

You could argue anything you want

The stance you will take will depend on whether you are acting for Seller or Purchaser.

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By bus1ptk
19th May 2014 21:20

Thanks again. Its always good to hear people opinion.

It's a family member who wants to buy the shares (currently a director but not a shareholder). Current shareholder is willing to sell to her but just don't want her to get ripped off!

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By chicken farmer
19th May 2014 23:32

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?

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By bus1ptk
19th May 2014 23:40

I'm completely unrelated to the possible transaction.... I'm simply helping a relative get to grips with the situation... Offering no professional advise on this one.

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By User deleted
20th May 2014 08:08

In which case ...

... your best advice to the relative would be to seek professional advice.

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By chicken farmer
20th May 2014 09:14

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.

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By User deleted
20th May 2014 09:19

.

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