Valuation of company shares; common reasons.

Valuation of company shares; common reasons.

 29th April 2013

The activity of company share valuation is  part of the natural lifecycle of a business.  At certain times of change the facility to change company directors may be paramount to the survival of the business.  In such situations the business requires both contract advice and financial expertise.  Here is an example of two common situations

Removal of a Company Director

It’s a tense time within the business when there is deadlock in the boardroom or a fall-out between company directors, sometimes resulting in the removal of a company director .  These are usually highly emotional situations.  If a correct shareholder agreement is in place, then a mechanism is there to cater for solving director dispute.  Without this commercial agreement the director dispute or deadlock relies on the interpretation of the law or an informal approach leading to dispute which can leave a trail of problems and further cost down the line.

When a director decides to part company; the next step requires valuation of the company shares; when it comes to valuing the shares, Philip Simpson of 525 Accountancy comments, “Valuing shares is a fundamental part of assisting the smooth departure of a director; if handled incorrectly conflict can arise leading to substantial legal fees and it may be some time before the business returns to its current state”.

David Reilly director at Create Ts and Cs comments” it’s best to have a commercial agreement in place to deal with the natural ups and downs of business.   Things can go wrong and change naturally occurs in companies, so it’s best to put a contract in place at the beginning, when the sun is shining; having a facility to deal with future issues is simply best business practice”.

Due Diligence – selling a business or appoining a new Director

So the business has reached a certain point where it’s time to sell or attract investment.  Although each event is very different, they are both stressful and exciting times for managing director. According to a recent Financial Times article on March 7, 2013, commenting on the advantages of having a board in place, “the board is as good a way of having checks and balances in a business. It’s not a panacea in all cases, but is there a better way of attracting investment?  The providers of capital will want to keep a check on what management’s doing. So there needs to be some sort of mechanism to provide reassurance that capital is being put to good use”. A board can provide assurance to investors, however the board requires a contract to ensure a structure is in place to deal with future issues and support sustainability.

David Reilly comments, “it’s always an interesting time for the company directors, as a potential new company director or investor assesses the value of the business and conducts due diligence, a tailored commercial agreement puts a framework in place and gives the board options when circumstances change.  The most important issue is the business is sustainable”.

Philip Simpson adds, “An independent valuation of the finances is critical, to getting all parties to agree a figure as quickly as possible so the existing directors can move forward with the business. So, why not pay a reasonable sum and have the peace of mind that there will be no problems in the future and all the relevant diligence has been completed”.

In conclusion having both the financially and contractual expertise in place will support the various natural transitions a company will go through.  The right contract will provide options for change and support those changes.  Having the expertise will guide the business through the various challenges and will help the business to be sustainable.

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