How is a buy-in price worked out?
A buy-in is priced in three steps. First, the whole agency is valued, usually from normalised earnings, with every working owner's role, including the incoming partner's, costed at a market salary. Second, the enterprise value is bridged to equity: debt is deducted, surplus cash or assets added, and working capital checked against what the agency needs. Third, the stake itself is valued, taking account of the rights it carries.
The ATO's guide to market valuation says a value is better supported where the report specifies the interest being valued and its rights, for example whether it is an individual shareholder's interest or a class of shareholders' interests. For a buy-in, that means naming the parcel, the share class and the agreement that governs it.
Is a 20% stake worth 20% of the agency?
Not always. A minority parcel cannot control dividends, pay or a sale, and private company shares can be hard to sell, so where the purpose calls for the market value of the parcel itself, the valuer considers whether a discount applies and explains why. Some shareholders agreements instead set a price formula, such as a pro rata share of the whole agency's value with no discount. Where an agreement sets the basis, the valuation follows it.
Hypothetical illustration, with invented figures: an agency's equity is valued at $2 million. A 20% parcel on a pro rata basis is $400,000. If the purpose calls for the market value of a 20% minority parcel with no control and limited ability to sell, the figure may be lower, with the reasons set out in the report. Which basis applies is a question for the agreement and your advisers, not a choice made to reach a number.
Is the incoming partner buying new shares or existing shares?
The answer changes who receives the money and the tax position. If the agency issues new shares, the money goes into the company and the existing owners' percentage falls. If the principal transfers existing shares, the money goes to the principal, and the disposal is generally a CGT event for them.
Where the parties do not deal at arm's length and the price differs from market value, section 116-30 of the Income Tax Assessment Act 1997 replaces the capital proceeds with market value for CGT purposes. A valuation gives both sides a market value reference before the price is agreed.
What tax rules apply when staff buy in at a discount?
Where a company offers shares to an employee at a discount, the employee share scheme rules can apply. The ATO explains that the discount is the difference between the market value of the ESS interests and the amount paid, and that it is included in the employee's assessable income. Concessions may apply depending on the type of scheme and its conditions. If the shares are not discounted, the ESS rules do not apply, although CGT can.
Either way, market value is the starting point, which makes a valuation a sensible first step for any staff equity offer. Your tax adviser confirms how the rules apply to your scheme.
What should the buy-in agreement cover?
Your lawyer drafts and advises on the agreement; the valuation supplies the figures. Points to raise include:
- ·What is being bought: new or existing shares or units, and their class and rights
- ·Price and payment: cash, vendor finance from the existing owner, or instalments from future dividends
- ·Vesting or milestones, if the stake is earned over time
- ·Good leaver and bad leaver terms, and the price on exit
- ·A valuation method and date for future buy-outs, so a later exit does not start from scratch
- ·Roles, salary and decision rights, kept separate from dividends
- ·Restraints and confidentiality
What should an incoming partner check first?
business.gov.au tells buyers to collect and check financial information independently, examine three to five years of financials, and review licences, contracts and liabilities. Buying into an agency adds questions specific to the business: how dependent the income is on the principal you are buying alongside, how concentrated the client base is, whether the book or client ledger reconciles to the accounts, and whether any licence or authorisation the agency relies on is held personally. The valuation report sets out the information it relied on, which gives you a list to test.
What do we need from you?
To value a stake, we usually ask for:
- ·Three years of financial statements and year-to-date accounts for the agency
- ·The current shareholders or unitholders agreement and the share register
- ·The proposed terms: parcel size, share class, price formula and payment terms
- ·How each working owner is paid, including the incoming partner's proposed role
- ·Who the valuation is for, and whether both sides will rely on it
What does valuing an agency stake cost?
A stake is valued by first valuing the whole agency, so the fixed fee follows the agency's total annual turnover, agreed in writing before work starts. The band is set by the annual revenue, excluding GST, of what is valued: a rent roll's annual management income, an insurance or mortgage book's annual recurring income, or the agency's total annual turnover where the whole agency or shares or units in it are valued. Delivery time starts once payment and all required information have been received.
- ·Small Business Valuation: $1,495 + GST where the revenue of what is valued is under $2 million, delivered in 2 business days
- ·Medium Business Valuation: $2,495 + GST from $2 million to $3 million, delivered in 3 business days
- ·Large Business Valuation: $3,495 + GST above $3 million up to $10 million, delivered in 3 business days
- ·Above $10 million: quoted in writing before work starts, with the delivery date agreed before commencement
- ·Expert report for a dispute or court: $4,495 + GST, with the delivery date agreed before commencement
- ·Add-ons: +$495 per retrospective (past) valuation date and +$795 per additional entity