Corporate reorganisation: Valuation in support of structural optimisation Valuation services
Corporate reorganisation: Valuation in support of structural optimisation In a globalised economy where multi-faceted businesses have an array of interconnected stakeholders, corporate organisational structures can become very complex.
Valuing illiquid assets during a volatile market is significantly more complex than during a stable market as pricing metrics and benchmarks are highly
Large organisations with simple group structures are a rarity, whilst many mid-market businesses and SMEs have complicated structures due to the number of interconnected functions and assets that contribute to performance, and the diversity of available financing arrangements. The ever-increasing role of intellectual property in the value proposition of businesses also plays a part, as tax optimisation and transfer pricing arrangements lead to multi- jurisdictional structures and intra-group cost and profit sharing. Arrangements such as intercompany loans, guarantees and share pledges add further complexity by transferring financial obligations or risks between different parts of a group. For businesses that are growing or managing change corporate structures are fluid, with a continual need for legal entities to be created, adapted or closed down and for assets to be capitalised, transferred and protected. Acquisitive companies face the additional challenge of combining organisational structures in an optimal manner. ‘Corporate Reorganisation’ is a catch-all term covering transactions that facilitate the transfer of corporate items such as assets, liabilities or legal entities between different parts of the same corporate group, on a solvent basis.
Such reorganisations are driven by a variety of factors which include preparation for a sale or divestment, integration of business units following an acquisition, and optimisation in respect of operations, risk management or tax. Processes can range from the simple to the complex – a single asset transfer on the one-hand, to a full strategic reorganisation on the other and whenever corporate reorganisations take place, valuation is central to the process. Assessing the value of the items being transferred between different parts of a corporate group is important for several reasons.
volatile and recovery pathways so varied. Jim Davies Corporate Finance
Jim Davies Partner Financial Advisory London +44 (0)7841 829 826 jim.davies@frpadvisory.com
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Tax authorities typically require that intercompany transactions be conducted at arm’s length, particularly for cross-jurisdiction transfers. Assessing the market value helps ensure compliance with transfer pricing regulations, reducing the risk of tax disputes, penalties, and potential double taxation. Taxation and transfer pricing compliance:
Performance management:
Corporations often use transfer pricing as a tool for measuring the performance of different business units or subsidiaries within the group. When assets are transferred at market value, it provides a more accurate reflection of each unit’s profitability and efficiency, whilst understanding the true value of assets can guide decisions related to acquisitions, divestitures, or restructuring processes.
Financial reporting:
Transparent and accurate valuation practices can enhance shareholder and investor confidence in the group’s financial statements, which can in turn impact share prices and investment decisions. Investor confidence:
Accurate asset valuation is essential for proper financial reporting, ensuring that the financial statements of each entity reflect the true economic value of the owned assets. Distorted asset values can misrepresent the financial health of a legal entity and call into question compliance with accounting standards.
In summary, assessing market value to support asset or entity transfers within the same corporate group is critical for compliance with tax, accounting, and regulatory requirements, as well as for accurate financial reporting, internal performance measurement and overall corporate governance. It helps maintain transparency, mitigate risks, and ensure fairness among stakeholders.
Fairness among stakeholders:
Ensuring that assets are transferred at market value promotes fairness among shareholders, lenders and creditors as it prevents one entity from benefiting at the expense of others within the same corporate group.
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Valuation
Intangible assets Intangible assets – often strategically important in reorganisations – are notoriously difficult to value and require specific customised techniques. Understanding the contribution to revenue or cost savings that a single intangible asset makes requires a detailed understanding of the value chain, and modelling the appropriate residual income or profit share can be a complex exercise. Lifecycle is also a key consideration. Whilst some intangible assets such as patents have legally bound economic lives, others including technology assets have limited lives due to functional obsolescence, as they will ultimately be superseded by newer technologies or solutions. Conversely, long-established brands are often considered to have very long or even indefinite lives if it is assumed that investment in branding continues. Assumptions around economic life directly impact the cash flow or cost saving that underpins value, and the impact can be significant. Further challenges include preparing accurate financial projections for early stage intangible assets that have not achieved commercial scale, and ‘cost to recreate’ assumptions for aging assets whose replacement may take a different functional form to the asset itself.
HMRC review With reorganisations involving intangible assets often being tax
Firstly the items subject to transfer must be identified, the purpose of the process understood, and the basis of value established. Either ‘market value’ (as defined by the International Valuation Standards Council) or ‘fair value’ (as defined by the International Financial Reporting Standards) will typically apply. Market value is defined as: the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion*. The valuation process itself requires selection and justification of the most suitable methodologies for each component subject to transfer – that may mean different methodologies apply for different assets and entities, depending on the functions performed, stage of life and availability of information. Whilst classic business valuation techniques such as discounted cash flow or transaction multiples analysis may be appropriate, the process is often complicated as numerous assets and entities contribute to one collective profit stream. Isolating cash flows, applying the arm’s length principle and understanding risk are then important requirements.
driven, it is important that supporting valuations are prepared in a manner that tax authorities will recognise and be accepting of. HMRC typically undertake a five-stage process to review the following: 1. Transactional and functional analysis: Determination of the assets, operations, functions and risks that are subject to transfer, and establishing the buying and selling parties. 2. Asset identification: Developing an understanding of the assets or intellectual property being transferred in sufficient detail to conduct an informed valuation. 3. Context and setting: Establishing the purpose of the transaction, the acquirer’s ability to execute and the appropriate basis of value (e.g. market value, fair value, or arm’s length price). 4. Good valuation practice: Utilising appropriate methodologies and applying them in a technically correct and commercially reasoned manner. 5. Robust opinion of value: Ensuring that conclusions are well supported and would be defendable upon appeal.
Appropriate and robust assessment of value is thus a key
requirement in any corporate reorganisation.
Data management and financial modelling skillsets also become
important for larger reorganisations, if for example there are numerous legal entities or assets subject to transfer, or assessing the value or tax impact of different options is required.
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Our work FRP is a leading independent advisory firm with experts in the fields of Financial Advisory, Corporate Finance, Debt Advisory, Forensics and Restructuring. We have a dedicated valuation team who provide independent valuations and related advice in respect of corporate reorganisations, transactions, restructuring processes, financial reporting and disputes. We regularly advise on the value of legal entities and intangible assets and have supported a number of listed and international companies with successful reorganisations.
Valuation services
Financial Advisory
Corporate Finance
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January 2024
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