Company director and valuation of company

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  • #43356
    Angelao
    Participant

    We have a claim from a company director who receives a directors salary of £3000pa.  She is the sole owner/shareholder and the company provides hair extensions and replacements.  She works in the business and does not employ any staff-she leases premises..

    The company did not make any profit last year but has turned a corner this year and has made approx £15,000 net profit. We have valued the company at £22,000 which is her net profit after tax x twice price earnings ratio.  However as she seems to be analogous to a sole trader and works in the company am I able to disregard the value of her company in accordance with reg 49 (5) and (6)?

    Any help appreciated 

    #123029
    Anonymous
    Guest

    I am not an expert in company law, however I am just wondering as you have made reference to Sole Trader whether she is a true director.

    I believe that the Company has to be registered/limited or a PLC in order for there to be a requirement for directors. She may be leasing a premises/shop but if the liability for Business Rates and Rent is in her name then she is a sole trader and those amounts have to be taken into account as outgoings.

    Where she is named as the liable party and not the company then I would suggest that she is not really a “director”

    I may be barking up the wrong tree but think you need more information before you can make a decision.

    #123030
    Angelao
    Participant

    Yes she is a director and receives a directors salary. However her company is analagous to that of a sole trader and therefore I am wondering whether I am able to disregarded the value of the company-I know there has been a lot of debate on previous posts

    #123032
    Anonymous
    Guest

    So – her company is really like that of a Sole Trader and it is not a limited company. How have you been able to work out the value of the company? eg are there any shares available in it. Does it have shareholders?

    have you taken accoun of the rent that she pays and the rates.

    #123039
    Anonymous
    Guest

    “Analogous” to sole trader means the operation is on a scale where for all practical purposes the owner’s day-to-day activities are indistinuishable from those of a sole trader: she works alone, has no employees, tends to think of the company in her own mind as just an extension of herself rather than a separate legal personality. A lot of the company’s theoretical value might be in the form of “good will”, which means in plain English that without her there on the job there isn’t much else of value – there would not be much point someone buying this company off the claimant unless she was thrown in as part of the deal, but there would then be a much higher salary expense because she wouldn’t work for someone else for £3000 a year. The near impossibility of arriving at a sensible capital valuation of such an enterprise is why we have Reg 49(5) and (6).

    This sounds to me like the type of case where you would use that Reg.

    However, there are swings and roundabouts because you are entitled to say the comnpany could afford to up her salary from £3000: with no other shareholders to keep happy, there is nothing to stop her from taking the profit. So the notional earnings rule would apply.

    #123040
    Angelao
    Participant

    Thanks Peter

    That explains it perfectly

    #123047
    John Boxall
    Participant

    While I dont think it’s relevant to this case, this document may be of interest

    http://static.bdo.uk.com/assets/documents/2012/04/Private_Company_Price_Index_Q1_2012.pdf

    Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and—and in short you are for ever floored.

    Wilkins Micawber, Ch12 David Copperfield

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