The Shadow Adviser Playbook
A recap by Senior Manager Nick McCarthy on our last webinar "The Shadow Adviser Playbook”
In July we delivered the first webinar in our series – the Shadow Adviser Playbook: Four Top Tips for Family Lawyers - to over 300 attendees. On 6 October we will deliver the second webinar in the series - Business Accounts: Red Flags, Hidden Value and Common Pitfalls. Attendance is free, and you can secure your place contacting us to request the booking link.
Now is an opportune time to recap our previous webinar. The key points we discussed were as follows.
1) Business valuation and drivers of value
Valuing a company is not as straightforward as simply relying on the net assets stated on its balance sheet. Even if valuing a company by reference to its net assets is the appropriate valuation method, for valuation purposes it is important to consider the adjustments that are needed to restate the company’s assets and liabilities to their market value. Common examples of this include uplifting the value of a property owned by a company that has appreciated in value over time, and writing down or eliminating assets that are impaired or irrecoverable.
Furthermore, there is a variety of methods available when valuing a business, which can result in vastly different valuations, and it is critical to adopt the most appropriate valuation method to arrive at a sensible valuation. Even when there is consensus on the appropriate method, the valuation of a company is more an art than a science, and disagreements can arise between valuers concerning the assumptions that underpin a valuation, which can ultimately be subjective. Common examples of this include what level of director's remuneration would constitute a market-rate cost, the size of the profit multiple to be applied, etc. Company valuations can be highly sensitive to such assumptions; it is therefore vital to distinguish between agreed facts and assumptions, and to set out the rationale for the latter.
2) Tax matters
There are various ways to extract capital from a company, such as withdrawing cash, disposal of surplus assets, sale and leaseback of business premises etc. Alternatives to the extraction of cash include asset distributions and the restructuring of company shareholdings. Each option has its own unique tax implications, and careful consideration is required to determine which option best mitigates the tax liability of an individual disposing of their company shares.
One tax-effective option that can sometimes be used is a Company Purchase of Own Shares (“CSOS”), whereby a company acquires the shares of an exiting shareholder. As part of a CPOS, the payment to exiting shareholder can be treated as either an income distribution (i.e. dividend), which is taxed at less favourable Income Tax rates of up to 39.35%, or a capital gain, which is taxed at the more favourable Capital Gains Tax rates of 18%/24%. If the share disposal qualifies for Business Asset Disposal Relief, this entitles the exiting shareholder to an 18% rate of tax on their first £1m of gains. The conditions for a CPOS are also complex and open to interpretation. Careful consideration is therefore required to determine whether the criteria for a capital distribution are satisfied.
3) Share rights
A company's share capital often comprises various categories of share, and when valuing an interest in a company it is necessary to consider the voting and dividend rights attached to each share category.
Even where there is clarity on how to apportion value between a company’s various share categories, however, when valuing an individual shareholding it is seldom as straightforward as simply multiplying an individual’s interest by the company value, i.e. valuing their interest on a pro rata basis. It can often be appropriate to apply a minority discount to reflect a minority shareholder’s limited ability to influence the day-to-day running of the company. Before doing so, however, it is necessary to consult the company’s shareholders’ agreement, which sometimes precludes the application of a discount, and also to consider whether the company being valued is a quasi-partnership, in which case it would not be appropriate to apply a minority discount. Some of the key hallmarks of quasi-partnerships include:
Personal relationship of mutual trust and confidence
An understanding that all (or certain) shareholders will participate in management
Restrictions on transferring shares
Small number of shareholders
Informal arrangements
A common scenario that arises during matrimonial valuations is where both spouses hold a 50% interest in the company being valued, in which case a deadlock position arises, as neither party can pass an Ordinary or Special resolution without the other’s cooperation. Careful consideration is required in such scenarios as to what level of discount would best reflect the diminution of value caused by this deadlock position.
4) Shadow advisers
Parties to a matrimonial dispute often have questions concerning the valuation report prepared by an expert, and sometimes an expert’s response to written questions does not resolve matters. There may also be other reasons for challenging the appointed expert’s report. In such scenarios a shadow expert is sometimes instructed to review the work of the appointed expert, identify whether any technical matters have been treated incorrectly, and challenge any dubious judgements made by the expert.
In a recent case we were assigned as a shadow expert, and identified errors in the appointed expert’s report which had the effect of undervaluing the company in question by hundreds of thousands of pounds. In another recent shadow expert assignment, we identified an error which had the effect of materially misstating the expert’s calculation of the tax liabilities arising on the disposal of the Parties’ interests in the company.
We look forward to you joining us on 6 October, and if any of the above services could be of value to you, please get in touch.
Getting in Touch
Fee estimates and CVs are readily available. Quotes can typically be provided within two working days.
Email: fiona@fhmforensic.co.uk
Telephone +44 (0)7770 642491
