GROWTH SHARES – NOW MORE THAN EVER THEIR TIME HAS COME
Undoubtedly the coronavirus pandemic has created huge problems for British and global businesses great and small. So many companies over a wide range of business sectors face an unexpected and catastrophic decline in revenues which will continue for weeks if not months. Ordinarily many such businesses would struggle to survive in this situation.
The UK government have announced subsidies covering 80% of salary up to a maximum of £2,500 for workers who have been laid off temporarily or “furloughed” and this may help but realistically these companies cashflow problems can’t be entirely resolved in this way.
Companies are going to need a cash injection or a means of cutting their payroll costs without eroding their talent base and workforce value or a combination of the two.
So how can they do this? One option is to apply for a loan under the UK government’s Coronavirus Business Interruption Loan Scheme (“CBILS”). The problem with this scheme for many companies, even if they were able to successfully apply, is that they would remain 100% liable for the debt in circumstances where many of them have debt in the first place.
So many companies will be looking for equity investment.
Meanwhile, management would normally expect to be paid more than the £2,500 maximum available. So how might they be incentivised to stay around?
One option which involves the issue of equity is to issue them with growth shares. These are shares typically issued to senior management which reward them for growing the Company. Typically they are issued a special class of share (say a “B” share) with special rights which allows them to receive a share of any growth in value of a Company when the company is sold – usually referred to as an exit event. This requires a valuation of the Company now, usually carried out by an independent valuer. Let’s say the company is valued at £10 million. The B shares would then participate on an exit event to the extent of say 10% of all exit consideration above a hurdle of say £15 million.
The advantage for managers of setting up such a scheme now is that values are likely to be depressed giving them a lower hurdle to achieve and potentially a higher benefit on exit.
There are some tax issues with the issue of UK growth shares. Usually they are issued at a low Par value – managers are not expected to pay a significant amount for them. In some cases they are accepting a lower salary which may be one of the objectives of the Company – to conserve cash.
The tax issue is that if the growth shares issued are more valuable than the amount subscribed, usually at Par then UK income tax is payable on the difference. For this reason the growth shares also have to be valued and the hurdle needs to be set substantially higher than the current value to reduce the value of the growth shares. This might make them less attractive to managers who are giving up some salary. Having said that the advantage of issuing growth shares now is the lower current valuations.
For example we carried out a valuation a few months ago where the value of the Company was very close to the hurdle and it was clear that the shares would at the very least have a substantial “hope value”. However in recent days we have revisited the company valuation as further growth shares have been issued and it is clear the Company value is not even close to the hurdle and unlikely to be so in the foreseeable future so it is likely that HMRC will accept that currently the shares are worth very little.
So this option would also be of benefit if you or your client already has a growth share scheme in operation. From a valuation perspective now is the perfect time to be issuing further shares.
VC has a dedicated team that deals with tax valuations headed up by a past training officer of HMRC, who has over 25 years of experience in this field.
If you believe that your business, or that of your client may benefit from the issue of Growth shares the team at Valuation Consulting would be pleased to discuss your valuation requirements. We can also put you in touch with the specialists who can create the best scheme for your needs. All our initial discussions and information reviews are free of charge, so please do get in touch and we’ll see how we can help.