Principle

In a bid to align the economic interests of management with their own, investors in companies or investment funds either award or sell their senior executives financial instruments. These schemes will in turn ensure that management compensation reflects the added value generated or the growth in enterprise value achieved.

While the design and structure of a management incentive scheme determines the degree to which management and investor interests are aligned, its valuation is required in appraising senior executives’ financial commitment – estimated when the financial instruments are disposed of – and the basis on which they will be taxed.

Strict compliance with currently applicable financial accounting standards and tax laws imposes a proper valuation of financial instruments. In particular, fiscal regulations state that beneficiaries of these instruments must acquire them at their true intrinsic value or risk exposing themselves and the company to a fiscal requalification.

Methodology

In order to value financial instruments included in management packages, carried interests, or stock-options, an analysis must first be conducted to choose the most relevant valuation models. Three methods are generally considered: the Black & Scholes equation, the binomial/trinomial tree model, and Monte Carlo simulations.

The scope of application includes:

  • Analysing the financial instruments’ gain/loss profile based on the growth in value of its underlying asset
  • Analysing the options forming these financial instruments
  • Analysing the restrictions placed on financial instruments issued in the context of an LBO operation: public listing, “recap” modeling, adopting levels of financial leverage that differ from those used by the target company or comparable public companies
  • Analysing the financial instruments’ volatility while taking into account the characteristics of the underlying asset (listed or non-listed stock), financial structure, etc.
  • Analysing the consequences of the instruments’ lack of liquidity
  • Analysing the consequences of stock-options rights including, “vesting” or “good leaver/bad leaver” clauses.

Our Work

Our options-pricing missions are specifically designed to:

  • Assist in defining and structuring management packages
  • Simulate gain/loss scenarios of beneficiary-related incentive schemes, and the determination of their value in the context of a negotiated situation
  • Accompany the company during negotiations with management
  • Provide an expert’s opinion on the value of the financial instruments, used in response to third party claims (auditors, tax authorities, etc.).

Our services emphasize:

  • Legibility: we produce clear, straightforward reports destined to all the stakeholders in a mission (investors, managers, tax authorities, etc.)
  • Compliance: our reports are thoroughly documented and comply with the latest IFRS accounting recommendations. They also meet the reporting standards expected by the tax authority
  • Flexibility: our methods are well adapted to analyse simple financial operations, but also more sophisticated financial constructs, catering to listed and non-listed companies alike
  • Instructive : we are mindful of our relationship with managers. We aim to have an instructive and unifying role across the duration of our mission.

Credentials