Giving equity to your sales lead or property manager? Start with what the shares are worth on the day.

A key staff equity valuation sets the market value of the shares or units you plan to issue or sell to a key employee, such as a sales lead, property manager, senior broker or account director, at the date they change hands. That value is the starting point for the price, for the tax treatment your adviser applies, and for any later buy-back when the person leaves. The fee is set by the agency's total annual turnover: $1,495 + GST under $2 million, delivered in 2 business days. Delivery time starts once payment and all required information have been received.

Why does the value of the shares at issue matter?

Bringing a key person into ownership is one way an agency keeps the people clients follow: the sales lead who wins the listings, the property manager the landlords trust, the broker who holds the renewals, the account director the biggest client asks for.

The price they pay matters to everyone. If it is below what the shares are worth, the existing owners give away value and the employee may face a tax question. The ATO explains that if employee share scheme interests are provided at a discount, special tax treatment may apply where conditions are met, and that working out the discount starts with the market value of those interests. If the price is above market value, the employee overpays. A value at the date of issue, prepared independently and written down, settles that question before anyone signs.

What do the employee share scheme rules say, in general?

Your accountant decides how the rules apply to your arrangement. In general terms, the ATO describes these features of the rules that took effect on 1 July 2015:

• ·For tax-deferred schemes, the taxing point is the earliest of: no risk of forfeiture and no restriction on sale; for rights, exercise with no forfeiture risk or disposal restriction on the resulting share; and 15 years after acquisition. Employment ending on or after 1 July 2022 is no longer a deferred taxing point.
• ·An employee can hold up to 10% ownership, or control up to 10% of voting rights, counting all interests including rights, before the holding is significant and concessional treatment is lost.
• ·A separate start-up concession is limited to unlisted companies whose group companies were all incorporated less than 10 years ago, with aggregated turnover no more than $50 million, an Australian resident employer, a 3 year minimum holding, and shares discounted by no more than 15% of market value.

What is a minority parcel in an agency worth?

A key staff member usually takes a small parcel: perhaps a few percent, rarely control. On a market value basis, a buyer of that parcel alone would not control dividends, strategy or a sale, and would have no ready market for the shares. Those features can make the parcel worth less than its straight proportion of the whole agency.

The rights attached to the shares also matter, and they are set by the constitution and the shareholders' agreement: dividend rights, drag-along and tag-along terms, pre-emptive rights, and what happens to the shares if the person leaves. We read those documents before valuing, and the report states whether the value is pro rata or for the parcel as a parcel, and why.

Should the value include what the employee will bring?

Market value at the date of issue reflects the agency as it stands on that date. The growth the employee is expected to create after they become an owner is the reason for the arrangement, but it has not happened yet, and the ATO lists reliance on information from after the valuation date among common valuation issues.

If the employee already holds key relationships, that is part of today's business. Where they are the person clients deal with, the valuation should say how much of the income depends on them staying, because a hypothetical buyer would ask the same question. For a staged buy-in, each tranche has its own date and may need its own value.

Which interest is being valued?

Agencies bring staff into ownership in different ways, and each changes what we value.

• ·Ordinary shares in the operating company that holds the rent roll, book or client contracts
• ·A separate class of shares with limited voting or dividend rights
• ·Units in a unit trust that runs the agency
• ·Shares in a new company set up to hold one division, such as property management or a new office
• ·Options or rights over shares, where the scope is confirmed in writing before we start

What happens when they leave?

The shareholders' agreement should say what happens to a departing employee's shares: whether they must be sold back, at what price basis, and whether a good leaver and a bad leaver are treated differently. When that time comes, it is an exit valuation on the basis the agreement sets; see Partner and shareholder exits, buy-ins and buy-sell agreement valuations. Setting a clear valuation clause at issue avoids arguing about it later.

What does a key staff equity valuation cost?

Shares or units are valued from the whole agency, so the band is the agency's total annual turnover, even for a small parcel.

The band is set by the annual revenue, excluding GST, of what is being valued: a rent roll's annual management income when the rent roll is valued on its own, an insurance or mortgage book's annual recurring income when the book is valued on its own, or the agency's total annual turnover when the whole agency, or shares or units in it, are valued. A business on exactly $3 million is Medium, and one on exactly $10 million is Large. Add-ons: +$495 per retrospective (past) valuation date, and +$795 per additional entity. Delivery time starts once payment and all required information have been received.