• Current students
      • Student centre
        Enrol on a course/exam
        My enrolments
        Exam results
        Mock exams
        Learning Hub data privacy policy
      • Course information
        Students FAQs
        Student induction
        Course enrolment information
        F2f student events
        Key dates
        Book distribution
        Timetables
        FAE elective information
      • Exams
        Exam Info: CAP1
        E-assessment information
        Exam info: CAP2
        Exam info: FAE
        Access support/reasonable accommodation
        Extenuating circumstances
        Timetables for exams & interim assessments
        Interim assessments past papers & E-Assessment mock solutions
        Committee reports & sample papers
        Information and appeals scheme
        JIEB: NI Insolvency Qualification
      • CA Diary resources
        Mentors: Getting started on the CA Diary
        CA Diary for Flexible Route FAQs
      • Admission to membership
        Joining as a reciprocal member
        Conferring dates
        Admissions FAQs
      • Support & services
        Recruitment to and transferring of training contracts
        CASSI
        Student supports and wellbeing
        Audit qualification
        Diversity and Inclusion Committee
    • Students

      View all the services available for students of the Institute

      Read More
  • Becoming a student
      • About Chartered Accountancy
        The Chartered difference
        What do Chartered Accountants do?
        5 Reasons to become a Chartered Accountant
        Student benefits
        School Bootcamp
        Third Level Hub
        Study in Northern Ireland
        Events
        Blogs
        Member testimonials 2022
        Become a Chartered Accountant podcast series
      • Entry routes
        College
        Working
        Accounting Technicians
        School leavers
        Member of another body
        International student
        Flexible Route
        Training Contract
      • Course description
        CAP1
        CAP2
        FAE
        Our education offering
      • Apply
        How to apply
        Exemptions guide
        Fees & payment options
        External students
      • Training vacancies
        Training vacancies search
        Training firms list
        Large training firms
        Milkround
        Recruitment to and transferring of training contract
        Interview preparation and advice
        The rewards on qualification
        Tailoring your CV for each application
        Securing a trainee Chartered Accountant role
      • Support & services
        Becoming a student FAQs
        Who to contact for employers
        Register for a school visit
    • Becoming a
      student

      Study with us

      Read More
  • Members
      • Members Hub
        My account
        Member subscriptions
        Annual returns
        Application forms
        CPD/events
        Member services A-Z
        District societies
        Professional Standards
        Young Professionals
        Careers development
        Diversity and Inclusion Committee
      • Members in practice
        Going into practice
        Managing your practice FAQs
        Practice compliance FAQs
        Toolkits and resources
        Audit FAQs
        Other client services
        Practice Consulting services
        What's new
      • In business
        Networking and special interest groups
        Articles
      • Overseas members
        Home
        Key supports
        Tax for returning Irish members
        Networks and people
      • Public sector
        Public sector news
        Public sector presentations
      • Member benefits
        Member benefits
      • Support & services
        Letters of good standing form
        Member FAQs
        AML confidential disclosure form
        Institute Technical content
        TaxSource Total
        The Educational Requirements for the Audit Qualification
        Pocket diaries
        Thrive Hub
    • Members

      View member services

      Read More
  • Employers
      • Training organisations
        Authorise to train
        Training in business
        Manage my students
        Incentive Scheme
        Recruitment to and transferring of training contracts
        Securing and retaining the best talent
        Tips on writing a job specification
      • Training
        In-house training
        Training tickets
      • Recruitment services
        Hire a qualified Chartered Accountant
        Hire a trainee student
      • Non executive directors recruitment service
      • Support & services
        Hire members: log a job vacancy
        Firm/employers FAQs
        Training ticket FAQs
        Authorisations
        Hire a room
        Who to contact for employers
    • Employers

      Services to support your business

      Read More
☰
  • The Institute
☰
  • Home
  • Articles
  • Students
  • Advertise
  • Subscribe
  • Archive
  • Podcasts
  • Contact us
Search
View Cart 0 Item
  • Home/
  • Accountancy Ireland/
  • Articles/
  • Leadership/
  • Latest News/
  • Article item

Share valuation

Apr 01, 2019
While anyone can present themselves as an expert on share valuations, integrity is the hallmark of the professional.

A Picasso painting may be valued at €50 million; your house valued at €1 million. These valuations have no underlying measurement, save the willingness – through supply and demand – of interested parties to own the asset. The valuation of shares is different, however, in that there are underlying practice and measurement norms.
Valuation permeates all aspects of business. It is the measure of capital value on stock markets across the world; the mainspring of wealth and its creation; and the store of value for the economic well-being of a nation. It’s your pension fund.

In 2010, Chartered Accountants Ireland published The Valuation of Businesses and Shares by the author of this article. A second edition followed in 2016. Since publication, readers have enquired as to numerous aspects of valuation. This article is a stock-take of these enquiries.

The hallmark of the professional valuer

A major category of enquiry is share valuation related to legal wrangling of one kind or another. This includes shareholders disputes, marital separations, acquisitions or investments gone wrong, the interpretation of share rights and entitlements, and so on. Some are complicated or have poor paperwork. In my experience, the accepted practice in share valuations is poorly understood.

In all circumstances – without exception – integrity (meaning objectivity, independence and impartiality) is the hallmark of the professional valuer. Regrettably, I have seen numerous instances of ‘hired gun’ valuations where the intention is to please the client by presenting an unjustifiably high or low valuation to suit the circumstances.

Happily, in my experience the valuer in these circumstances has rarely been a Chartered Accountant. There are no statutory guidelines or restrictions as to presenting oneself as an expert on share valuations. Quite a few individuals and organisations present themselves as experts. Some are competent; many are not. The financial crash starkly illustrated how few investment advisers understood valuation.

The nonsensical role of EBITDA

Another category of enquiry relates to earnings before interest, tax, depreciation and amortisation (EBITDA). A consistent misnomer, commonly misunderstood or misdirected, is the use of EBITDA in valuations whereby valuations are based on a multiple of EBITDA. The use of EBITDA in valuations is often presented as some form of sophisticated expertise. It is, in fact, nonsensical. Please refer to my article on EBITDA in the August 2017 edition of Accountancy Ireland.

For the sake of good order, should any reader feel aggrieved as to my dismissal of EBITDA, please write to me quoting even one textbook approval of EBITDA, any academic study supporting it, or indeed any evidence at all as to the validity of EBITDA as a method of valuation. I will publish it.

Valuing different classes of shares

A regular category of enquiry – probably the most common – relates to the valuation of different classes of shares. There are many disagreements as to which shares have what value in companies with several classes of shares. There may be different entitlements as to dividends, voting rights and/or assets on a winding up. There may be share options or loan conversion rights which, if exercised, would alter or diminish the rights of existing shareholders. Sometimes, because of restricted rights, a particular class of share is valueless or heavily discounted. The ensuing row is that this likely outcome was not understood by the investor at the outset; leading to allegations of misrepresentation. The allocation of a company’s value across different classes of shares is usually a difficult exercise. It would be better if this aspect was given proper consideration through simpler share structures in the first place.

The ‘grievance’ valuation

The final issue that regularly appears is the ‘grievance valuation’. An aggrieved shareholder demands that the valuation is set at an unjustifiably high level to including compensation or punishment for the alleged grievance. One or both parties in a dispute may be difficult personalities, with rational thought and reasonable behaviour proving remote in the circumstances.

Familiar refrains, as expressed to the writer, include: “I have worked there for X years and you say my shares are only worth X euro”; “This was my father’s business and you are insulting him (or his memory) with this valuation”; and “John Doe is a crook and your valuation is letting him away with it.”

One can only explain patiently that the valuation and the value of the grievance, if any, are separate matters. A willingness to listen and explain confirms the hallmark of the professional valuer – back to what was said about integrity at the outset of this article.

Des Peelo is author of The Valuation of Businesses and Shares, 2nd edition, published by Chartered Accountants Ireland.

The latest news to your inbox

Useful links

  • Current students
  • Becoming a student
  • Knowledge centre
  • Shop
  • District societies

Get in touch

Dublin HQ

Chartered Accountants
House, 47-49 Pearse St,
Dublin 2, Ireland

TEL: +353 1 637 7200
Belfast HQ

The Linenhall
32-38 Linenhall Street, Belfast
Antrim BT2 8BG, United Kingdom.

TEL: +44 28 9043 5840

Connect with us

CAW Footer Logo-min
GAA Footer Logo-min
CARB Footer Logo-min
CCAB-I Footer Logo-min

© Copyright Chartered Accountants Ireland 2020. All Rights Reserved.

☰
  • Terms & conditions
  • Privacy statement
  • Event privacy notice
LOADING...

Please wait while the page loads.