HMRC internal manual

Shares and Assets Valuation Manual

SVM110050 - Tax Advantaged Share Schemes: Enterprise Management Incentives (EMI)

Guidance is available in the Employee Tax Advantaged Share Scheme User Manual at ETASSUM50000.

A qualifying employee of a qualifying company may hold unexercised tax advantaged share options (EMI and CSOP) with an unrestricted market value (UMV) of up to £250,000. The £250,000 limit applies from 16 June 2012; with a previous limit of £120,000 from 6 April 2008 and a £100,000 limit before that, subject to a total value of £3 million for all employees.

How to agree the value of the shares for Enterprise Management Incentives (EMI)

Some customers have asked for more detailed guidance on the correct valuation approach to EMI incentives and in consultation with external stakeholders, SAV has produced some simplified examples (below).  SAV will consider the value proposed if a valuation of both the Actual Market Value (AMV) and Unrestricted Market Value (UMV) for any shares under options is submitted with form VAL231.  SAV should not be approached until the company is actually in a position to grant the EMI options. EMI valuations are given priority upon receipt in the office. If we need to discuss the valuation further, then they are treated in line with other correspondence. We will consider a check before the options are granted and during the 12 months and 92 days after the options have been granted.

Valuations for EMIs are valid for 90 days from the date of the agreement subject to the proviso that there are no changes in the Company’s circumstances that might affect the value of its shares prior to the options being issued. If the options have not been granted within this time frame applicants will be required to submit a fresh application with a newly completed form VAL 231 .

Valuations submitted undergo an initial risk assessment and only a proportion receive detailed examination, those considered lower risk will receive a limited without prejudice acceptance.  Some agents have raised concerns over HMRC accepting some unrealistically low EMI valuations on a without prejudice basis.  Such low values are sometimes queried by potential company purchasers during due diligence, causing potential delays or difficulty in company sales.  The agreement of EMI valuations is a voluntary service provided by SAV, therefore, we are not obliged to agree a valuation for EMI purposes and SAV will not enter into protracted correspondence.  Applicants may grant the options without the value being agreed.

In accordance with the valuation hierarchy, familiar in accounting, there is often no better indication of value than actual transactions involving the same or similar asset. When considering the open market value of the company’s shares, the valuer should first ascertain whether there has been any recent transactions in those shares, the frequency of trades and any factors peculiar to those exchanges. An initial investment by an external investor with preferential rights may require substantial adjustment.  If there are more frequent exchanges either between employees or unconnected small investors the prices paid may provide a reliable guide to current market value.

In the absence of an active market and any recent transactions, the use of an appropriate valuation technique would be employed.

Any recent transactions provide an indication of value including any restrictions, that is, the Actual Market Value . The Unrestricted Market Value is the value without taking any such restrictions into account. The AMV and UMV should always be considered. However, it is sometimes suggested by applicants that restrictions, such as those on transfer, do not depreciate value. The same price for both AMV and UMV is therefore proposed. Both values do not need to be agreed provided the price agreed represents at least UMV and options are granted at that price. There is then no need to agree an AMV.

Valuing unquoted shares can be complex, but for small companies that may need to do a valuation, we’ve provided some illustrative examples below. These examples are not definitive or exhaustive and apply to companies with the most straightforward circumstances.


Start up company A – a technology based company with no trading history

The issued share capital is made up of 2 million shares.

1p A ordinary shares = 200,000 1p ordinary shares = 1,800,000

Both types of share have equal rights apart from:

  • the A shares having the right under the company’s articles of association to appoint 2 directors to the board
  • the A shares come before the ordinary shares on a return of capital
  • the ordinary shares are subject to risk of forfeiture and pre-emption provision

All the A shares are owned by an external investor who paid £2 million for them, or £10 per share.

The company now wants to grant EMI over a pool of 10% of as yet unissued shares to its employees.

There is no sale or flotation planned in the near future but the company plans for this to happen in the next 3 to 5 years.

It needs to provide valuations for Actual Market Value (AMV) and Unrestricted Market Value (UMV) of the ordinary shares at the date the EMI options are granted.

The company has no trading record. The assets consist of the balance of the cash from investment and some intangible assets.

A reasonable and tangible starting point to value the ordinary shares may be to look at the price paid for shares by the investor.  the figure would require adjustment to reflect.

Preferential rights of the A shareholders

Changes in market conditions since the initial investment.

Changes in company business plan.


The company could reasonably discount that price by at least 30% as these shares carry fewer rights and possibly substantially higher, depending on the exact fact pattern. This would indicate an AMV of £7 per ordinary share.

When calculating UMV you should ignore the risk of forfeiture and pre-emption provision and so a 10% premium might be reasonable. This would indicate the UMV is £7.70.

Start up company B – a company with no external investment

In this scenario, all the initial capital is provided by the founder shareholders. 2 people invest £50,000 of their own money and receive 50,000 £1 shares in return. The issued share capital is then 100,000 £1 ordinary shares.

To build the business, the founders want to recruit but as they cannot afford commercial salaries for the new employees, they want to give them EMI over a pool of £10,000 shares in total.

Like start up company A, the company has no trading history and very few assets. So in this case, it could be reasonable that the employee shares are valued the same as the founders’ shares at £1 per share.  As in example A, it may also be reasonable to discount this if the founders have some preferential rights over and above the employees, according to the company’s articles of association.

Established trading company - with no external investment

This company:

  • has been trading for around 10 years
  • wants to incentivise employees by granting them a pool of up to 5% of the company’s enlarged share capital
  • is not in the process of a sale or flotation

To establish the AMV and UMV, the management accounts for 2012 have been used as the last published accounts (to November 2011) are considered stale by the company at the valuation and it’s reasonable to take into account more up to date information.


  Full audited accounts to November 2010 Full audited accounts to November 2011 Management accounts to November 2012
Turnover £6.5m £7m £7.5m
Post tax profit £525k £600k £600k
Dividends paid £1 per share £1 per share £1 per share
Dividend cover 2.62 3 3

If all possible sources of conversion exercised their options, the fully diluted share capital would be 200,000 £1 ordinary shares.

To get an idea of the AMV, the company needs to know or work out the:

  • earnings per share
  • dividends per share
  • price-earnings ratio – a valuation ratio of the company’s current share price compared to its per-share earnings
  • dividend yield percentage

From its accounts record, maintainable post tax profit (earnings) are £600k per year. This would mean earnings per share of £3.

Dividends are maintainable at £1 per share and are well covered.

To get an idea of the price-earnings ratio, the company looks at a quoted company on the full London Stock Exchange in the same market. It shows a price-earnings ratio of 12.03.

To reflect the differences between a minority holding in this company and the quoted company, the company discounts this price-earnings ratio by around 60% to 65%. This gives a final price-earnings ratio of 4.5.

To work out the AMV the company then multiplied the price-earnings ratio of 4.5 by the earnings per share of £3: 4.5 x £3 = £13.50.

This value can be cross checked by looking at the dividends payable. To work out the dividend yield the company looked again at the same quoted company which had a dividend yield of 3.40%. The company then increased this by a multiple of around 2, again to reflect the differences between the companies. The revised yield percentage is 7.4%.

The same AMV is achieved by dividing the maintainable dividend of £1 per share (equal to 100%) by the dividend yield of 7.4%:100 ÷ 7.4% = 13.5.

To work out the UMV, the company adds on around 20% to the AMV to give a value of £16.20 per share. This reflects that the Articles of Association for the company give the Board full veto on any share transfers and this and other restrictions should be ignored when calculating UMV.

Using other multiples instead of a price-earnings ratio

A multiple (of profits) can be used in place of a price-earnings ratio to calculate share value. You can work out the multiple by looking at the sales of companies – both private and quoted – in similar markets to the company under consideration.

To make sure any implied multiples are, so far as possible, reliable and comparable, you must carry out careful research of the terms of these companies’ sales beforehand.

If the company has a high level of debt on its balance sheet, which reduces any post tax profits substantially, the value of its shares can be arrived at by reference to an Enterprise Valuation (EV) looking at its maintainable Earnings Before Interest Depreciation and Amortisation (EBITDA).

It is then possible to apply an EBITDA multiple from a comparable quoted company. Deducting the company’s debt from the resulting EV will then leave the Equity Value, from which the minority share value can then be assessed, applying appropriate discounts.

Whilst EBITDA multiples for quoted companies are not available in publications such as the Financial Times, these can be calculated by the valuer, usually by adding a particular quoted company’s market capitalisation to its long term debt, to arrive at its EV.

The EBITDA for the quoted company can then be calculated by reference to its accounts and dividing the EV by the EBITDA, to give the multiple. It can then be appropriate to discount the quoted company’s EBITDA multiple to reflect the differences between the quoted company and the unquoted company which is being valued.

EV to EBITDA multiples can be found in the BDO Private Company Price Index (PCPI) which tracks the relationship between the EV to EBITDA multiple paid by trade buyers when purchasing UK private companies. The PCPI was updated in 2013 to incorporate EV to EBITDA multiples as the method of valuation, replacing the previously used Price to Earnings ratio.

Multiples can also be found in the private company Price Earnings Ratio Database (PERDa) compiled and analysed by members of the Leading Edge Alliance, a global alliance of major, independently owned, accounting and consulting firms.

The PERDa provides information on the pricing of private company sales and acquisitions. It shows the quarterly movements in the average Price Earnings Ratio (PER). This ratio measures the relationship between the consideration (price paid) for private companies and their underlying profits on an adjusted basis and includes the average PER based on Earnings Before Interest and Tax (EBIT) and Profit After Tax.

Note: Both the PCPI and PERDa are average measures and act as guides, and not as absolute measures of value, as there are many significant factors that can have an impact on value.

Depending on the starting point it may be appropriate to adjust the multiple to reflect factors such as comparable sales, trading activity, industry standards, age of the business, reliance on key personnel etc.

Company with imminent Alternative Investment Market (AIM) flotation

A previously private computer software company is planning to float on AIM in the next 2 weeks but wants to grant EMI options to employees first.

The price that investors are invited to buy shares at, which will also be the opening price on AIM, will be £2.50 per ordinary share.

The employees will be granted EMI options over the same ordinary class of share as will be floated on AIM, but there will be individual performance targets in their option agreements that will determine when they can exercise their options.

A small discount may be appropriate, depending on the facts, to reflect any risk that the float may not go ahead in the scheduled time frame.

It may therefore be reasonable to use the price of £2.50 per share or, subject to the above factor, very close to this, as both AMV and UMV for the purpose of granting the EMI options.

There’s no need to adjust or discount (for a valuation for option purposes) to reflect the performance conditions restricting the employees’ freedom to exercise their options, as these conditions are personal to the employee only.

Company in talks over a sale

A component production company is in talks with a competitor business for a sale of the company. The sale price, subject to due diligence, is likely to be made up of cash and a small earn-out element.

In anticipation of a sale, the company wants to grant EMI options over 10% of the fully diluted share capital to its employees.

The exact sale proceeds are not known but the likely range equates to £20 to £22 per share on a pro rata basis.

In the light of the impending sale, it’s reasonable to value the shares over which options will be granted to the employees by reference to the possible sale proceeds per share.

Depending on the level of risk, uncertainty over the final amounts payable and also the timing, it might be reasonable to apply a discount in the range of 20% to 40% indicating a share value of around £12 to £17.60 per share for the EMI options. It will depend on the specific circumstances of the company as to whether a differential is required between the AMV and UMV.



  Additional Guidance:SVM150000