Looking at valuation issues from start-ups to mature businesses.

1. VA L U AT I O N I N T H E C O N T E X T O F
T H E B U S I N E S S ( C O M PA N Y )
L I F E C Y C L E

2. HOUSEKEEPING
@pkfFrancisClark

3. pkf-francisclark.co.uk
Valuations in the context of the
company (business) life cycle
What?
Start Up Growth phase Established / Exit /
Succession

4. Why?
Introduction and caveats:
• “Valuation of shares in private companies is not an exact science
• Our indication is therefore purely our opinion
• Others may place a different value on the shares” (especially if they are buying /
selling)
• Ultimately a company is worth what someone will pay for it
But even for a valuation set by a process involving a “willing
buyer and a willing seller” there is likely to be some
negotiation and in some cases there is no buyer and seller. In
both situations it can be useful to understand the valuation
drivers in order to influence opinion?

5. How?
• Valuation “touch points” at each stage of the life cycle; from
the perspective of:
• Tax
• Legal
• Private Equity/ Venture Capital firm
• Corporate Finance
• Presenters
• Martin Brown – PKF Francis Clark
• Henry Maples – Murrell Associates
• Brent Treloar – FSE/ CIOSIF
• Ed Marffy – PKF Francis Clark

6. Methodologies
Net Asset Value1
2
3 Net Present Value / DCF
Comparative / Multiple based

7. Net Asset Value
Method
Assets
–
Liabilities
=
Equity value
1

8. Multiple (PER): 6.6
www.perda.net
Comparative / Multiple based
Method
“Maintainable earnings”
X
Multiple
=
Enterprise value
Adjustments:
• Average over 3-4 years
• Remove exceptional costs / income
• Normalising directors’ remuneration
+/– Net cash / debt
+/– Normalise NWC
=
Equity value
2

9. Net present value / DCF
Method
What is the value today?
= Discount rate
Y 1 Y2 Y3 Y4 Y5+
3
+/– Net cash/debt
+/– Normalise NWC
=
Equity value
Discounted future cash flows
=
Enterprise value
+
Terminal value

10. October 2019
Valuations in the context of the
Business (Company) Lifecycle

11. Start-up
EXAMPLE
Technology company
• Small turnover
• 2-5 person
• Pre-profit
DISCUSSION POINTS
Set up
1. Shareholder agreements
2. Ensuring IP within business
Seed capital
1. Seed investment funding
2. SEIS / EIS relief

12. Start Up/ Pre-revenue – Legal considerations
Henry Maples
Partner
Murrell Associates LLP
henry.maples@murrellassociates.co.uk
• Shareholders’ agreement
• Scope of the business
• Founder(s) working time commitments
• Restrictive covenants
• Transfer initial lock-in
• Transfer of pre-existing assets (e.g. intellectual property)

13. Start-up
 What is the value of a company immediately prior to
receiving an investment?
 What percentage of a company's ownership will be
offered…
 …in exchange for a specified investment amount.
 Valuations have been relatively steady for past 3 years.
 £2million range rather than £10 million+.

14. SEIS / EIS relief
Tax incentives to encourage investment
Effect on valuation?
-Equity Crowdfunders highly encourage/insist on this relief.

15. Growth
EXAMPLE
Fudge manufacturer
• Family owned
• Profitable
• Growing
DISCUSSION POINTS
Growth capital
• Valuation / minority discounts
• PE/VC considerations
Management incentives
• Incentivising managers
through shares – EMI/Growth
shares
• Leaver provisions

16. 75%
25%
Minority discounts
The valuation must reflect the extent
to which the owner can realise the
cash flows associated with the asset.
HMRC Share and Asset division guidance
Shareholding Discount Note
>75% Nil Special resolution
50.1% to 75% 10% Ordinary resolution
50% 15%
25% to 49.9% 30%-50% Block special resolution
10% to 25% 50%-65% Demand audit
<10% 70%-80%
Total company value £500k
Pro-rate 25% £125k
Minority discount at 50% (£62.5k)
Minority Value £62.5k

17. Young, growing business
 Market – growing, desirable, right time & high barriers
to entry(IPR, exclusivity, niche)
 Offering – compelling market proposition &
differentiated
 Business model – viable & scalable
 Team – risk/reward, capability & composition

18. EMI/Growth shares
• Minority discount generally results in low valuation of shares
• Information used in valuation is that which is available to an
external investor – this can also result in lower valuations.

19. Growth business – legal considerations
Henry Maples
Partner
Murrell Associates LLP
henry.maples@murrellassociates.co.uk
• Leaver provisions
• Vesting
• Good / bad leaver
• Price
• Identity of ‘buyer’

20. Established
EXAMPLE
Engineering consultancy
• Key
management/founders
still major shareholders
• Profitable
• Steady growth
DISCUSSION POINTS
Larger investment
• Investment capital
Founders exit
• Employee ownership trusts
• Consideration structure
• Earn outs
• Consideration in form of
shares

21. Established
 Strength of brand
 Future financial performance
 Customer base
 Experience and skills of management team
 Supply chain strengths
 Future market direction

22. Trade secrets

23. Employee ownership trusts
Rules in place to ensure fair valuation of business

24. Established company – legal considerations
Henry Maples
Partner
Murrell Associates LLP
henry.maples@murrellassociates.co.uk
• Consideration structures
• Deferred v Earn out consideration
• Calculation
• Restrictions
• Security
• Set off
• Consideration shares

25. BE PREPARED – GRANT ASSISTANCE?

26. NEXT…
Q&A and/ or discussion
• Access to Finance
Future breakfasts – 1st Tuesday of the month
• Family Business Connect
• Till death do us part (or maybe earlier)
• Other
• “Green business”, Block chain etc.
Future breakfasts – Sector specific / one off
• Cornwall & Isles of Scilly Local Industrial
Strategy – 15 October 2019
• Food and Drink – “waste” – 28 October 2019
And do not forget our blog, which contains details of
new funds/ sources of SME funding that come to
our attention, and our Finance in Cornwall factsheet

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