Business Clinic: Valuing minority shareholding in farming company

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, Sarah Dodds, a partner and head of agriculture at MHA, advises on the challenging process of valuing shares in a farming company.

See also: Business Clinic – tax advice on farm sale and machinery disposal

Q. I’m having issues when it comes to valuing a minority shareholding in our limited company.

The company is currently all agriculture and is being passed on to the next generation. The owner of this minority shareholding (15%) has never had anything to do with the farm. 

They are of the opinion that their shares are worth face value. However, we’re saying they are only worth that if the company was dissolved or sold.

In reality, we think they should be heavily discounted as this minority shareholder has no influence over any part in the business. 

Can you offer some advice please?

A. The valuation of shares in a private company is more of an art than a science.

The basic rule for tax purposes (and I am assuming that is what is required here) is that:

“…the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expected to fetch if sold in the open market at that time…”

(S2 Section 160, Inheritance Tax Act (IHTA) 1984).

It also ignores any impact on the value if the whole of the property was put on the market at the same time.

Comparables are hard to find

What that means in practical terms is that one looks for comparable open-market values.

But in the absence of such comparables (and how often does a 15% shareholding in a private company change hands in the open market?) you will need to construct a theoretical value reflecting all the factors that would be taken into account by arms-length buyers and sellers.

The price can be projected on two different bases.

Where there is a regular stream of profits, possibly distributed annually by way of dividends, one would look at the annual results, weighted over a period of years, adjust them for non-commercial aspects such as funds lent to the company interest-free by the owners, land occupied rent-free or directors’ salaries which are not paid at full market value.

These adjustments will increase or decrease the profit.

The adjusted profit stream can then be capitalised up at the rate of return that an external investor might expect from this type of investment.

Balance sheet values

The alternative, and normally easier, approach is to look at the company’s balance sheet but again, to adjust this up or down to realisable values to give a balance sheet based on current rather than historic values.

Normally, this will involve a notional revaluation of land, including any corporate tenancies that may have a significant value.

The notional value also needs to look at the value of other company assets such as machinery, livestock and cultivations, all of which need to be brought up to market value for the purposes of this exercise.

Any net notional increases in value will mean that there is a notional corporation tax liability that will also need to be calculated.

Assets or income

Finally, whether the valuation is based on assets, income or a combination of both, the figure needs to be discounted to reflect the fact that the theoretical buyer will have no means of turning their investment into cash, possibly until such time as the company is wound up, nor will they have any control over the running of the company.

The level of discount will depend on the size and distribution of other shareholdings and possibly the age and succession plans, and relationships of other shareholders.

Typically, a minority shareholding of this size might be discounted by 40-60% depending on circumstances.

If profits are regularly distributed by way of dividend, the discount might be somewhat lower.

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