Shareholding – looking at transferring?

Quite often, a company holding a family business may need to improve its ownership structure; this can mean transferring shares from ‘individuals’ into ‘trusts’.

Common situations where this occurs:

• Succession planning – when the controlling individuals bring family members together in an attempt to make a viable business across generations.

• Risk protection – when the individuals are aware they have a significant business, relationship, or other type of risk to mitigate.

• Tax planning – transferring shares from ‘individual’ to ‘trust’ is a popular planning scheme when the individual income tax rate is higher than the trusts rate. Furthermore, dividend income can be distributed among family members as beneficiaries. It is important to note that any ownership change may cause potential tax implications to the business. So, make sure to inform and consult with the company’s tax advisor first.

Upon transferring from ‘individual’ to ‘trusts’, parties need to agree on the consideration for the shares. This is where you might need to pause and ask the question, what are my options? They could be:

• Shares at $1 each

• Coming up with your own estimation; or

• Getting a business or share evaluation completed by a specialist

Circumstances of where you may need to consider a special business or share valuation:

• If the business has a turnover of $20m or more and/or a profit of $2m or more,

• If there are difficult family members involved that could potentially question the scheme later.

Lack of the above, let’s assess the implication of not having a valuation, from both sides.

For the individual transferor, in effect, they are ‘gifting’ away the business. The value of this ‘gift’ needs to be established, so that if the ‘gift’ is challenged by a creditor claim, the creditors will be unable to dispute that the business was gifted under market value. Please note that the transferor should be solvent prior to the ‘gift’.

For the trustees transferee, they need to have a clear idea of the value of investments on the balance sheet because:

• They have a duty to report this information to beneficiaries, and to protect the value of the assets going forward.

• They may need to apply for finance at a later date and asset values need to be supportable.

• They may later dispose those assets and the cost or initial value will be relevant.

For the above purpose, at Gilligan Sheppard, we provide a short-form valuation that captures the essence of the business, makes reasonable assumptions, and presents the value in a simple, easy-to-understand bullet point format (no fancy presentations or comprehensive narratives). You must be prepared to answer questions about the business and provide necessary documents such as, the historic P&L and balance sheet or forecasts.

And certainly, we can advise if a full valuation is required, and we are happy to assist with these as well.