The requirement for share valuations can be for:
- The settlement of relationship property;
- The sale or purchase of shares on the retirement of a shareholder from the business, the introduction of a new partner;
- The settlement of a claim by a minority shareholder who have been prejudiced pursuant to a claim under S.174 of the Companies Act 1993;
- Estate planning;
- Claims under the Family Protection Act 1955;
- Mergers or acquisitions of companies.
Shares can be valued using many methods all of which hinge on two bases, valuing the earning capacity or the net assets of the company.
Effectively the method of valuing the earning capacity is to determine the present value of the future cash flow. This may be the Discounted Cash Flow Model, the Capitalisation of Future Maintainable Earnings or other methods of providing a present value.
The Net Assets Valuation is generally undertaken if the income stream is such that its value is less than the realisable or fair value of the net assets of the company.
An alternative method which simulates the likely method of realisation of shares in a company is that the company would sell the business, realise its other assets that would not normally be sold with the business then settle all its liabilities and then be liquidated.
This method involves the valuation of the business and the assessment of the value of assets that are not transferred to the purchaser and the assessment of the liabilities of the company to determine the value of the “cashed up” company.
This method has some distinct advantages in that it highlights lifestyle assets in the business. The Mercedes Benz car or the SUV that is more useful for towing the boat or the horse float and is not an essential part of the business.