The business, the shares or the units: what is being valued?

The short answer, explained

People say "value the business" when they may mean three quite different things:

1. The business assets: the goodwill, plant, stock, contracts and intellectual property used in the business, sold by the entity that owns them.
2. The shares in a company that owns the business.
3. The units in a unit trust that owns the business, held under a trust deed.

The same operating business sits at the centre of all three, but what changes hands, and therefore what is valued, is different. A buyer of business assets takes only what the contract lists. A buyer of shares or units takes the whole entity, with its cash, debts, loans, contracts, tax history and past conduct. The valuation has to match the interest actually being transferred, or the number answers the wrong question.

Why the interest matters

What comes across. business.gov.au describes a company as a separate legal entity that can incur debt, sue and be sued. When the shares are sold, that entity does not change; only its owners do. Everything inside it, good and bad, stays with it. In an asset sale, the selling entity keeps its own history and any liabilities the buyer does not take on under the contract. business.gov.au advises sellers to set out exactly what is included in the sale.

Entity-level assets and claims. A share or unit value includes items that sit outside the operating business: surplus cash, investments, loans owed by shareholders or related parties, tax balances and borrowings. These are worked through in how cash and debt affect a valuation. Loans between the entity and its owners need particular care; see shareholder loans.

Trusts. business.gov.au explains that in a trust, a trustee holds the business for the beneficiaries and is legally responsible for its operations. In a unit trust, the value of the units depends on the market value of the trust's net assets, including the business and its goodwill, and on the rights the deed gives each class of unit. Depending on the deed and the terms of any resolution, amounts owed to beneficiaries, including distributions to which they have become presently entitled but which are unpaid, may be claims against the trust assets. A discretionary (family) trust has no units; the trustee decides how profits are distributed. Valuing the trustee company's shares is not the same as valuing the business it holds on trust.

The holding being valued. Once the entity is valued, a particular parcel of shares or units may be worth more or less than its percentage, depending on control and the rights attached. See is a minority shareholding worth its percentage.

Decision table

Illustration: one business, two different numbers

This example is hypothetical. The figures are round numbers chosen to show the steps.

A company runs a business valued at $1,000,000 as an operating whole. The company also holds $100,000 of surplus cash, owes the bank $300,000 and is owed $80,000 by a director, which is assumed to be recoverable in full.

Asset sale. The buyer pays $1,000,000 for the business assets. The company keeps its cash, repays its bank loan and collects the director's loan itself.

Share sale. The buyer takes the company as it stands. The value of all the shares is $1,000,000 plus $100,000 cash, less $300,000 bank loan, plus $80,000 loan receivable, which is $880,000.

Check: $1,000,000 + $100,000 = $1,100,000; less $300,000 = $800,000; plus $80,000 = $880,000.

Before tax and costs, the seller ends up in the same position either way: $1,000,000 plus $100,000, less $300,000, plus $80,000 is $880,000 after an asset sale, or $880,000 for the shares. Neither figure is "the value of the business" in every sense. $1,000,000 is the value of the operating assets; $880,000 is the value of the shares before any tax, transaction costs or other adjustments. Quoting one when the other is meant can lead to disputes.

Before the valuation starts

Settle these points in writing first:

• The entity: the exact legal name, ABN or ACN, and whether it acts as a trustee.
• The interest: business assets, all the shares, a particular parcel, or particular units, including the class.
• The constitution, shareholders agreement or trust deed, which may contain transfer restrictions, pricing formulas or valuation instructions.
• The valuation date and the purpose, because tax, family law and contractual purposes can require different standards of value.
• Related-party balances, so that loans are identified and dealt with separately.

For share transfers, the company must notify ASIC within 28 days of a transfer between shareholders, according to ASIC's guidance. That is a compliance step after the event; it does not establish the price.

Limitations

• This page does not give tax advice. Whether an asset, share or unit sale suits you, and the tax on each, is for your accountant or tax adviser.
• What legally transfers in a trust depends on the deed and on the steps taken. A lawyer should confirm it.
• The illustration ignores tax, transaction costs, working capital adjustments and contingent liabilities, each of which can change the figures.
• For tax-driven transfers, such as moving shares to a family trust, Oliver Group, the Valuo practice for restructures, tax and buyouts, explains when market value matters in valuing shares transferred to a family trust.

Next steps

• Write down exactly what is being transferred and by whom, and send it to your valuer with the constitution or deed.
• Ask your accountant for the entity's balance sheet at the valuation date, including all related-party loans.
• Ask your lawyer and tax adviser whether an asset, share or unit transaction is proposed, before the valuation is ordered.
• Use the enterprise to equity value calculator to see how the entity's balance sheet moves the number.

General educational information, not financial, tax or legal advice. Worked examples are hypothetical and do not value a real business. A valuation depends on its purpose, the evidence and the agreed scope.