We have extensive experience of valuing shares in private companies from advising on Company sales and purchases, obtaining funding for expansion and planning for succession.
As a consequence, we are frequently asked to provide independent valuations of companies where a transaction between connected parties is contemplated.
In recent years, Revenue have started to look more closely at transactions between connected parties such as owners and their company, family members and shareholder buy-outs in closely controlled companies. This happens particularly where share buy-backs occurred and also where retirement or entrepreneurial relief was availed of by one of the exiting shareholders. Whilst these transactions are undertaken for bona fide reasons such as succession planning, Revenue are more concerned about maximising the tax yield. (See post below)
One of the key areas that Revenue will look at is how the transaction was valued and whether the transaction represented market value.
In these scenarios, market value is regarded as the price that an independent buyer would be prepared to pay for the company at the time the transaction occurred.
While in many connected party transactions the parties will act independently, each trying to maximise their position, Revenue will disregard this where they have been common shareholders in the same entity.
Many business owners who do look for a valuation go to their existing Accountants or Auditors, who specialise in Accounting and Auditing and are not familiar with valuations. We found that many of these valuations don’t factor in all of the relevant knowledge.
In one recent case, where the company owned a significant property, which would realise more for redevelopment for retail purposes, the company’s accountants valued the company factoring in the increase in the market value versus the book value in the accounts. However, they did not consider that the company would have to pay Capital Gains Tax at 33% on the increase in the value of the property above its market value and as a consequence, over valued the company by over €500,000.
In a second case, the company had 2 distinct share classes comprising voting shares and non-voting shares. While the voting shares had the right to determine what happened at the company’s AGMs they were only entitled to a return of the amount subscribed for them on a winding up or on a sale of the company. The Auditors didn’t factor in the limits attaching to the rights and over valued the non-voting shares by €1.5 million and undervalued the Ordinary Shares by the corresponding amount. This left the beneficiaries of the share transfers open to a challenge by Revenue for underpaying CAT.
We also received a valuation report from a top 20 firm which was only 2 pages long. The valuer hadn’t set out why he adopted the particular approach that he had take and we would have concerns that in the future the valuation would be open to question based on what the property values were and this hadn’t been set out in the agreement.
It is essential that the valuer determines what local factors impact on the business and documents what is relevant at that point in time.
If you require assistance in company valuations, please do not hesitate to contact us.