Normally when one values a company or the shareholding in that company, we assume that the purchaser is a rational investor. He is not involved in the management company. He is purely an investor looking at the return he is likely to enjoy should he choose to invest in the company.
This investor will have limited funds and this potential investment will vie with those funds for our investor’s favour. This investment will, therefore, have to offer a competitive return for the potential investor in order that he will inject his capital into the business.
This sets the platform for any valuation involving HMRC.
There can, however, be a potential buyer, whom we would attribute the appellation of ‘special buyer’. This particular investor will pay a premium because the return he will secure from the shareholding will justify the investment.
The presumption will still be that the special buyer will act rationally and not out of sentiment. Any premium will need to be justified by the return generated.
A special buyer might well be another shareholder where:
- The acquisition of the shareholding under review will enable the special buyer to achieve a controlling interest or at least a holding of significant influence.
- The degree of influence may be governed by the rubric of the Company’s Articles of Association or shareholders agreement.
The target shareholding for the special buyer could be 75%, it could be 51% or it might be 25%.
Very often, the impact of the acquisition of the particular shareholding to be valued will depend on the stratification of the other shareholdings.
Securing a shareholding in order to build up one’s interest to between 25% and 49% may carry rather less of a premium if there is a shareholder with 51% or 75%, who exercises control. Of course that controlling shareholder might himself be prepared to pay a premium to prevent another shareholder securing sufficient shareholding to make himself more of a nuisance.
If the shareholding at stake could confer control to two or more of the other shareholders, there could be competition to possibly push up the price. However, the valuer has then to assess whether the two shareholders will act rationally to avoid a bidding war.
So often the process can come down to the valuer needing to assess the dynamics of the shareholding group, particularly if it is a family company.
A typical case might be where there are three shareholders and one is valuing a one-third interest. Suppose that the shareholders acquired their interest in a management buyout many years ago and all three have acted in concert. The valuer might look at the one-third interest and seek to value it on the basis of what a rational external investor would pay. In the absence of any direction in the articles or shareholders agreement to provide influence, the answer might be that the rational external investor would pay very little. He would judge that the two remaining shareholders, having run the company since the management buyout, would act together to minimise the influence of the external investor. That would translate to taking action to minimise any dividend return. Both these two owner-managers could be categorised as special buyers but the judgement would be that they are far more likely to act rationally and act in unison.
Much of valuation work is about the actual narrative. A valuer needs to understand the environment around the shareholding then put himself in the place of the would-be investor.
No set of circumstances are exactly the same in a valuation. Lambert Chapman’s Corporate Finance team undertake many valuations during the course of the year both in a fiscal and a commercial context. Very often these circumstances will relate to a matrimonial case or to commercial litigation. If you are a banker, solicitor or other professional advising your client in these circumstances and you need to appoint a professional firm to value a company or a shareholding within it, please bear us in mind.
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.