Business valuation is not simply a financial figure. It shapes how much capital can be raised, how ownership is shared, and how tax may be calculated. For founders, it may decide whether a fundraising round succeeds. For employees, the value set on share options affects both motivation and eventual reward. For shareholders, it influences how exit proceeds are divided and how disputes are resolved. In short, valuation sits at the heart of commercial and legal certainty.

When valuations are realistic and well evidenced, they provide a strong basis for negotiation. But when numbers drift into the over-optimistic, they create vulnerabilities that often only surface years later.

The risks of inflated figures

The main danger of an inflated business valuation is conflict. Shareholders may feel their interests have been diluted unfairly. Investors may accuse directors of presenting unrealistic forecasts. Such tensions can escalate into legal disputes, which are costly in both time and money.

Tax is another risk. HMRC rarely accepts valuations without scrutiny. If a company has granted share options or transferred shares based on inflated figures, HMRC may argue that an eventual taxable gain has been effectively understated. The result can be unexpected tax bills, penalties, and reputational damage.

A closer look at HMRC scrutiny

HMRC has become more active in reviewing Enterprise Management Incentive (EMI) schemes, which allow growing companies to reward staff through share options with favourable tax treatment. While the scheme is attractive, it depends on a credible valuation. If HMRC considers the numbers to be poorly justified, it can challenge the tax position.

Recent years have seen more detailed enquiries into growth forecasts, comparables, and discount rates. For businesses that relied on hurried or internally generated valuations, this questioning can unravel the benefits they expected and create friction with employees who suddenly face higher tax bills.

Can high valuations be useful?

Some founders and investors argue that high valuations are necessary to secure backing in competitive markets. A company that values itself too conservatively may struggle to attract funding. From this viewpoint, ambitious numbers are part of the marketing game.

There is some truth in this. High valuations can open doors to capital and talent. But ambition should not cross the line into distortion. A figure that looks bold in a pitch deck may look reckless in an HMRC enquiry or shareholder dispute. The challenge is balancing ambition with defensibility.

Lawyers can provide a safeguard against these risks. By reviewing the methodology behind a business valuation, they can highlight weak spots that regulators or opponents might exploit. They help ensure that disclosures are complete and that assumptions are documented. A well-structured agreement can also help so that, if disputes arise, the mechanisms for resolution are already clear.

This legal input reduces the likelihood of surprise liabilities and reassures investors that the company has acted responsibly.

Practical steps for businesses

There are practical measures businesses can adopt:

  • Use independent valuers: Professional valuers provide objectivity and credibility.
  • Stress-test assumptions: Considering multiple scenarios shows realism and foresight.
  • Keep detailed records: Notes of assumptions and comparables are vital if figures are questioned.
  • Refresh valuations: Outdated numbers can be as risky as inflated ones.

Wider lessons for the market

The temptation to push valuations higher is common across sectors. The lesson is that credibility matters as much as ambition. A business that shows its valuation process was careful and supported by evidence will fare better in the long run, even if its headline number is lower.

Chasing the highest possible business valuation may deliver short-term wins, but it exposes companies to legal disputes and HMRC challenges that can erode long-term value. The safer course is not to dampen ambition but to ground it in evidence, professional advice, and legal oversight. By striking this balance, businesses can pursue growth while ensuring their valuations withstand scrutiny.

If you have questions or concerns about business valuations, please contact Jaan Larner.