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The share valuation Worked Examples Group


The aim of the Worked Examples Group, a joint initiative with HMRC, is to improve understanding and reduce uncertainty for share valuations for employee share schemes. It follows the withdrawal of the HMRC non-statutory ITEPA Best Estimate and Post Transaction Valuation Check (PTVC) procedures by creating more Share Valuation Worked Examples for general guidance.

An initiative by William Franklin of Pett Franklin with advice from the Esop Centre, the Worked Examples Group (WEG) was formed with expert members nominated by the leading share scheme bodies: the Esop Centre, ProShare, the Employee Ownership Association (EOA) and the Share Plans Lawyers Group (SPLG).

WEG reviews worked examples submitted by share scheme valuation practitioners before submitting them to SAV.  WEG-approved worked examples may be published in HMRC’s manual and all are published by WEG on this webpage hosted by the Esop Centre.

WEG acknowledges the generous support of the Esop Centre and the advice of its Chairman Malcolm Hurlston CBE.

Submit an example

WEG encourages people to submit a relevant worked example for review.

You are encouiraged to send your example to weg@esopcentre.com

WEG members


  • William Franklin, partner, Pett Franklin & Co LLP (ProShare)


  • Joanne Beard, assistant director, HMRC Shares and Assets Valuation (observer)
  • Graeme Nuttall OBE, partner, Fieldfisher LLP (EOA)
  • Mark Gearing, Partner, Fieldfisher LLP (EOA)
  • Graham Muir, employee incentives partner, CMS Cameron McKenna Nabarro Olswang LLP (SPLG)
  • Ian Murphie, ‎ director, Share Plan Partners (ProShare)
  • David Craddock, owner, ‎David Craddock Consultancy Services (Esop Centre)

Co-opted members

  • Jenny Nelder, partner, Bruce Sutherland (co-opted member)
  • Rebecca Clayton, partner, valuations practice PwC (co-opted member)
  • Steve Whitaker, senior manager, PwC (co-opted member)

Technical secretary David Craddock (Esop Centre)

Worked examples


The valuation of unquoted shares can be complex and this guidance is aimed at those with the most straightforward circumstances in low tax risk situations. The following are examples of valuation approaches in a number of encountered circumstances. They should not necessarily be regarded as authoritative, exhaustive or definitive, merely as illustrations of what might be acceptable to SAV for the purpose of agreeing valuations. The overriding principle remains that no two companies are the same and each valuation must be considered on its merits and the relevant facts.

Share Valuation Worked Example 1

EOT Owned company (“PAMELA”)

Pamela Limited is an owner managed business which was founded by its CEO Ms Pamela Smith. Pamela Limited has grown steadily since it was started 20 years ago.

1) Ms Pamela Smith is looking to retire in a few years’ time and in the meantime would like to scale back her involvement with the business. From time to time the business has received approaches from potential purchasers but Ms Pamela Smith would prefer Pamela Limited to continue to be independent after she retires and be run by the management team and employees who have helped her build the business.

2) A couple of years ago she arranged for the company to issue free shares to all the employees under the government’s Share Incentive Plan (SIP). The result was that Ms Pamela Smith held more than 95% of the company’s single class of ordinary shares and the employees held the remaining shares through the SIP.

3) Valuation of the ordinary shares was agreed with HMRC for those SIP awards. This involved a theoretical calculation of the value of Pamela Limited of £3M based on a multiple of profits, with a large discount for the individual shareholdings being very small, uninfluential minority holdings in an unquoted company.

4) A few weeks ago Ms Pamela Smith converted Pamela Limited into an Employee Ownership Trust (“EOT”) owned company under FA 2014 Schedule 37 rules by selling 70% of the Ordinary shares to the EOT, leaving her with over 25% and the employees holding the balance of the shares.

5) The sale of the 70% holding involved a Sale and Purchase Agreement. (“SPA”) between Ms Pamela Smith and the EOT. The total maximum potential consideration for the sale of the 70% holding was agreed between Ms  Pamela Smith and the trustees at £2.8 million based on a multiple of profits but with much of the consideration being deferred and dependent on the generation of future distributable profits and surplus cash after the change to EOT ownership. As a controlling interest was being sold there was no discount, unlike for the earlier SIP awards.

6) Under the SPA £800,000 is payable to Ms Pamela Smith immediately on completion from available cash and distributable profits. The balance of the maximum further potential consideration of £2 million is anticipated to be paid in 5 annual instalments of £400,000 over the next 5 years.

7) These instalments will only be paid, if in the future, the now EOT owned company generates sufficient surplus cash and profits to be able to gift money to the EOT to allow the anticipated instalments to be paid by the EOT to Ms Pamela Smith. If there are not sufficient distributable profits and cash generated in the future some or all of the consideration in excess of £800,000 cannot be paid to Ms Pamela Smith.

8) During the transitional period, while there is outstanding consideration due to Ms Pamela Smith, future profits of the company will be required to fund the paying off by the EOT of the consideration due to Ms Pamela Smith. As a result the potential for employees to receive dividends on their direct shareholdings is limited. But to deepen the employees’ sense of ownership and responsibility, after the conversion to EOT status, direct employee share ownership is being increased by a new issue of free shares under the SIP. But these will be small minority holdings and control will remain with the EOT.

9) In the future after the end of the transitional period when the trust’s obligations to the EOT have been fully discharged and future profits are fully available for shareholders it may then be appropriate to value further SIP share awards on a dividend basis of valuation.

10) But, as the fundamental economic nature of Pamela Limited ‘s  business has not changed following the conversion to EOT ownership, while future profits will be needed to fund the EOT’s obligation to Ms  Pamela Smith, a valuation based on a multiple of profits continues to be more appropriate with a discount for SIP shares being small uninfluential minority holdings in an unquoted company. However this theoretical valuation of Pamela Limited  may also need to take into account,  through a deduction ( however determined) from the whole company value, for Pamela Limited’s  non-contractual obligation to fund the EOT from future profits to allow the EOT to pay the outstanding balance of the consideration to Ms  Pamela  Smith.

Share Valuation Worked Example 2

Public Service Mutual Healthcare CIC (“Healthcare CIC”)

Healthcare CIC is an employee-owned community interest company.

Healthcare CIC’s share capital comprises redeemable ordinary shares of £1 each (each a Partnership Share) and one ordinary (non-redeemable) share of £1.

Shares may only be held by employees.  Each permanent employee may subscribe for one Partnership Share for £1.

Each share carries one vote. In practice no dividends are paid and if they were they would be subject to the dividend restrictions in the Community Interest Company Regulations 2005.

If a holder of a Partnership Share ceases to be an employee of Healthcare CIC then their share is redeemed for £1.

The ordinary (non-redeemable) share is the same as a Partnership Share except that it is non-redeemable and must be held only by an executive director.

There are numerous issued shares and each shareholder has a very small insignificant minority shareholding.

The Actual Market Value of each share in Healthcare CIC is £1.

It is unusual in private company share valuations for the Actual Market Value and the Unrestricted Market Value to be the same but, in the particular circumstances of this example, the Unrestricted Market Value may also be taken as £1.

Share Valuation Worked Example 3

Start up companies

a) The valuation concerns a technology based, first year start up company, with no trading history.

The Issued Share Capital (ISC) consists of 2 million shares, 200,000 1p ‘A’ ordinary shares and 1,800,000 1p ordinary shares.

The two classes of shares rank pari passu apart from the ‘A’ shares having the right (under the Company’s Articles of Association) to appoint two directors to the board and rank before the ordinary shares on a return of capital.

The ordinary shares are also subject to risk of forfeiture and pre-emption provisions.

All the 200k ‘A’ ords are owned by an external investor, who recently paid £2m for their 10% minority shareholding, equating to £10 per share.

The company is now looking to grant EMI options over a pool of 10% of as yet unissued shares to its employees. There is currently no sale or flotation in prospect but the company has plans for such an eventuality within the next three to five years.

Valuations are needed for the Actual Market Value (AMV) and the Unrestricted Market Value (UMV) of the ordinary shares, at the date the EMI options are granted. See the Shares and Assets Valuation Manual at SVM110050.

The company has no trading record and the assets largely consist of the balance of the cash from the investment and some intangible assets.

To value the ordinary shares, it may be reasonable to look to the price paid by the investor for their 10% shareholding, as it provides a tangible starting point.

To allow for the lesser share rights of ordinary class of shares (to the ‘A’ ords) a discount of around 30% or more (from the £10 per share paid for ‘A’ shares) might be reasonable depending on the exact fact pattern – indicating an Actual Market Value (AMV) of £7 per ordinary share. For the Unrestricted Market Value (UMV) the risk of forfeiture and pre-emption provisions are to be ignored and so a 10% premium might be reasonable, indicating a UMV of £7.70 per ordinary share.

b) An alternative start up company scenario might, unlike the above example, involve no external investment, with all the initial capital being provided by the founder shareholders.

For instance, two individuals may set up a company with each subscribing £50,000 of their own money and having 50,000 £1 shares issued to them in return. The ISC would then be a total 100,000 £1 ordinary shares.

The two founders may wish to recruit some key staff to build the business but, as the company could not at that stage afford commercial salaries for the new employees, they may wish to give them EMI options over a pool of 10,000 shares in total.

As in the example above, the company has no trading history and little in the way of assets. In view of this, it might be reasonable to value the minority holdings over which the new employees will hold EMI options, by reference merely to the par value of £1 per share paid by the founders. It might be reasonable to discount the par value if the founders have some preferential rights over and above those of the employees, by virtue of the terms of the Articles of Association.

Share Valuation Worked Example 4

Established trading company

A company has been trading for around 10 years and wishes to incentivise its employees by granting them a pool of up to 5% of the company’s enlarged share capital. The company is not currently in the process of a sale or flotation. The company’s most recent performance is:

Full audited accounts to Nov 2010 Full audited accounts to Nov 2011 Management accounts to Nov 2012
Turnover £6.5m 7m 7.5m
Post tax profit £525k £600k £600k
Dividends paid £1 per share £1 ps £1 ps
Dividend cover 2.62 3 3

The fully diluted share capital would be 200,000 £1 ordinary shares.

The management accounts for 2012 have been utilised as it is considered that the last published accounts (to Nov 2011) are now stale at the valuation and it is reasonable to take into account more up to date information.

Based on this record of profits, maintainable earnings are taken as £600k per annum, which equates to earnings per share (eps) of £3, on the basis of the fully diluted share capital.

Dividends are maintainable at £1 per share and are well covered.

A quoted company (on full London Stock Exchange) that operates in the same market as this company, shows a price earnings (p/e) ratio of 12.03. Applying a discount of around 60% to 65% to the quoted p/e – to reflect the differences between a minority holding in this company and the quoted company – indicates a final p/e ratio of 4.5*

Applying a p/e of 4.5 to eps of £3 then indicates an AMV of £13.50 per share for a minority holding in this company.

Looking at the dividends, the same quoted company had a dividend yield of 3.40%. Increasing this by a multiple of say two – once again to reflect the differences between the quoted company and this company – indicates a revised yield % of 7.4%.

Applying this yield to the maintainable dividend of £1 per share (equal to 100%) then indicates an AMV of £13.50 per share, ie the same as the valuation on an earnings basis.

The UMV can then be taken at around a 20% premium to the AMV, ie at £16.20 per share, to reflect the fact that the Articles of Association for the company give the Board full veto on any share transfers and this and other restrictions are to be ignored when considering the UMV.

* A suitable multiple (of profits) may also be arrived at by reference to data on the sales of companies – both private and quoted – in similar markets to the company under consideration. Careful research of the terms of such company sales should be undertaken by the valuer before such transactional multiples are utilised, to ensure that the implied multiples are, so far as possible, reliable and comparable. If the company has a high level of debt on its balance sheet, which reduces any post tax profits substantially, the value of its shares can be arrived at by reference to an Enterprise Valuation (EV) looking at its maintainable Earnings Before Interest Depreciation and Amortisation (EBITDA). It is then possible to apply an EBITDA multiple from a comparable quoted company. Deducting the company’s debt from the resulting EV will then leave the Equity Value, from which the minority share value can then be assessed, utilising appropriate discounts.

Whilst EBITDA multiples for quoted companies are not available in publications such as the Financial Times, these can be calculated by the valuer, usually by adding a particular quoted company’s Market Capitalisation to its long term debt, to arrive at its EV. The EBITDA for the quoted company can then be calculated by reference to its accounts and dividing the EV by the EBITDA, to give the multiple. It can then be appropriate to discount the quoted company’s EBITDA multiple to reflect the differences between the quoted company and the unquoted company which is being valued.

Share Valuation Worked Example 5

Company with imminent AIM flotation

A previously private Computer Software company is scheduled to float on AIM in the next two weeks but wishes to grant EMI options to employees beforehand.

The price that investors are invited to subscribe for shares, which will also constitute the opening price on AIM, will be £2.50 per ordinary share.

The employees will be granted EMI options over the same ordinary class of share as will be floated on AIM but there will be individual performance targets in their option agreements that will determine when they can exercise their options.

A small discount may be appropriate, depending on the facts, to reflect any risk that the float may not go ahead in the scheduled time frame.

It may therefore be reasonable to use the price of £2.50 per share or – subject to the above factor – very close to this, as both AMV and UMV for the purpose of granting the EMI options.

No adjustment/discount is required (for a valuation for option purposes) to reflect the performance conditions restricting the employees’ freedom to exercise their options, as these conditions are personal to the employee only.

Share Valuation Worked Example 6

Company in talks over a sale

A component production company is in talks with a competitor business for a sale of the company.

The sale price, subject to due diligence, will likely be comprised of cash and a small earn-out element.

In anticipation of a sale, the company wishes to grant EMI options over 10% of the (fully diluted) share capital to its employees.

The likely sale proceeds are not known but the range equates to £20 to £22 per share – on a pro rata basis.

In the light of the impending sale, it is reasonable to value the shares over which options will be granted to the employees by reference to the possible sale proceeds per share.

Depending on the level of risk, uncertainty over the final amounts payable and also the timing, it might be reasonable to apply a discount in the range of 15% to 30% indicating a share value of around £14 to £18 per share for the EMI options. It will depend on the specific circumstances of the company as to whether a differential is required between the AMV and UMV.

Note. A sale may affect a company’s qualifying status for EMI under Sch. 5 Para 9(3) ITEPA 2003. For further guidance see the Employee Share Schemes User Guide Manual at ESSUM52100.