Advice on share valuation for a company buyback

Shareholders have agreed amount for buy back of share -want to ensure no comeback if HMRC query MV

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I have a client private ltd company with 3 equal Director/shareholders.   One of them wants less responsibility.  So will resign as Director and want Company to buyback his share.    The arrangement all 3 are happy with is:

- he keeps his Company van worth £3k

- is paid £15k lump sum

- receives a further £12k in instalments 400pm over 30 months

During that 30 month period he will also receive income working  for the company on a subcontract basis (primarily to smooth over his leaving with the clients he personally deals with)   

I realise that the total £30k will be treated either as a capital gain or a distribution.   Presumably if a distribution, then the van would be BIK.    If capital gain, then I am thinking the whole £30 could be proceeds for sale of share (although with part being in instalments he would have to loan that part back for it to qualify).

My big worry is that they have agreed this sum of £30k but have not had a professional valuation.    I understand that there are various problems if HMRC argue a different market value.      I have looked at the guidance on HMRC SAV suggestions on how to value shares.  But I dont see that we can easily find a similar Company on the stock exchange (they instal insulation) to get comparative price to earnings ratios etc.

With the amounts of money involved it seems a shame for them to have to fork out a fortune to get a professional valuation.  But I dont want any nasty comeback from HMRC if we cannot come up with a reasonable valuation ourselves.

If they are only prepared to pay £30k,  but the market value is a lot different how does one deal with that?   

Any advice appreciated. 

 

 

 

Replies (7)

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By tom123
25th Nov 2017 20:37

If the shareholders are not connected, then the price paid is the market value - surely?

Or have I missed something?

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Replying to tom123:
By Ruddles
25th Nov 2017 21:42

Yes, you've missed something. All that we've been told is that the continuing directors/shareholders have agreed that the company will pay the outgoing director/shareholder £x for his shares. Just because they're unconnected doesn't make £x the market value. It might be, it might not be ...

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Replying to Ruddles:
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By tom123
26th Nov 2017 08:29

Busted! That'll teach me to comment on things I only vaguely remember from ATT.

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By barberbuzz
25th Nov 2017 21:01

Theyre not connected so i will be relieved if you are righr
Many thanks

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By barberbuzz
25th Nov 2017 22:16

If hmrc deem the MV to be higher, presumably they can assess seller on their figure to charge more CGT or income tax on distribution and the Company would be liable for more stamp duty

Frustrating when it is the agreed sum between them and i cant find any public company similar enough to give any useful comparisons to help calculate a value Based on their price earnings ratio

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Replying to barberbuzz:
paddle steamer
By DJKL
26th Nov 2017 13:55

Re sector the closest listed you are likely to get is construction services, here is a link to some.

https://www.constructionnews.co.uk/data/league-tables

I suspect I would be looking for lower down the list re say Aim shares which are less impacted by PFI/whole of life contracts re facilities management etc and more construction at a simpler level (if there is such a thing), so ignore Carillion, Interserve, Galliford, Kier, Morgan Sindall etc.

I suspect you fill find one with PE circa 10-15 depending on growth prospects, but not a sector I invest in as I work in related area (aversion to all eggs in one basket) and it can be cyclical and volatile (just ask Carillion, Interserve and Balfour Beatty over recent years).

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By Montrose
27th Nov 2017 18:08

To be safe you will have to pay for a professional valuation as required for an "Adjustor Clause" which is what you hoped to avoid. What it gives is a defence to any challenge.

The origin of the adjustor clause is enshrined in SP5/92, paras 12 - 15. Even though that is formally applicable only to the determination of arm's length value in the context of transactions with overseas trusts, it gives a clear view of what the Revenue require in an adjustor clause.

The catch 22 problem is that neither the Revenue nor the Courts will act as a valuer .

The solution is to follow SP5/92 and start with an independent arms length valuation, which is incorporated into the contract, and then to provide that if and only if a Government authority challenges that value, then the parties will adjust the price accordingly, with prompt settlement of any adjustment to the price and interest paid from the original sale date to payment of the adjusted price

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