Any shares owned in a private company, such as a family business, must be valued appropriately for probate purposes. How should this value be determined?

Why is it important to value shares? 

An estate’s Executors or Administrators (Personal Representatives (PRs)) are required by law to value all assets, including company shares, at their ‘open market value' as if each item had been sold at the date of death: however, they must ensure that related property is also considered when determining the probate value of the shareholding in an unquoted company, as we discuss further below. 

There’s no market value readily available for shares which are not quoted on a stock market. So, the PRs must determine an appropriate market value of the shares as at the date of death (the probate value) for inheritance tax (IHT) reporting purposes.   

The valuation of privately owned company shares is an extremely complex area so it’s recommended that PR’s who are not experienced in this area should obtain the help of valuation specialists. 

How should family businesses be valued? 

Various valuation methodologies may be considered when estimating the open market value of a shareholding in a private company. The most appropriate approach/es to apply will be dictated by the specific nature of the company and shareholding being appraised.  

All typical valuation approaches will fall under one of three categories:  

The asset approach:

This assesses the value of a business by considering the market value of its underlying balance sheet, typically with reference to its net asset position. This approach is often suitable for non-going concerns, early-stage companies, or whereby the underlying tangible assets are deemed strongly representative of the company’s overall value. However, it doesn’t account for hypothetical goodwill related to ongoing trading, making it less applicable for valuing trading companies operating as going concerns. Despite its limited use in such cases, the Net Asset Value (NAV) method can serve as a baseline valuation, providing a meaningful assessment in scenarios considering the business’s break-up value.  

The income approach: 

This assesses the value of a business by converting anticipated future economic benefits into their present value through appropriate time-discounting. The discounted cash flow (DCF) method is a primary technique under this approach, involving the discounting of a business’s future expected cash flows, with respect to their “time-value of money” and associated risk of receipts. The resulting present values are then totalled to determine the current present value of all future cash flows, with considerations such as reliable cash flow forecasts, terminal value calculations for businesses with infinite lifespans, and the selection of an appropriate discount rate being crucial components of this valuation approach.