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Business Valuations in Shareholder Disputes

Numerous circumstances can create the need for shareholders to determine the value of their privately-held company. Common reasons include retirement, execution of a buy-sell agreement, or divorce. Regardless of the cause, the situation typically bears some level of dissension and can lead to litigation. This article presents three ways in which a business valuation expert can help resolve shareholder disputes with respect to business value - either in or out of the courtroom.


When the shareholders of a business are faced with the dilemma of determining their business' value, a business valuation expert can assist in resolving the matter.


Experts typically are retained to:


1. Determine a preliminary assessment of business value and/or damages;

2. Provide a third-party, independent opinion of value of the business to both parties in the dispute; and/or

3. Provide a valuation opinion for litigation support.



Preliminary Assessment


Retaining a business valuation expert to conduct a preliminary assessment of business value and/or damages can be an efficient method of resolving a shareholder dispute outside of a courtroom. A preliminary assessment often is employed to determine damages, such as lost profits and lost business value, and usually can be provided by the expert in a timely and cost-effective manner. The client and legal counsel may utilize this information before and during negotiations for settlement purposes. A preliminary assessment also is useful in determining whether pursuing litigation would be a cost-effective approach to resolving the dispute.


A preliminary assessment of business value only requires a limited level of diligence. The scope of work typically includes the following:


· Limited review of financial statements

· Cursory review of market and business transactional data

· Review of initial results with client and/or counsel


The output provided to the client and counsel by the expert often is an oral opinion or a brief opinion letter with accompanying schedules that outlines the steps taken by the expert to derive the value conclusion. Due to the limited level of diligence performed, a preliminary assessment only should be utilized prior to or during the initial stages of litigation.



Independent Value Opinion for Both Parties


The parties involved in a business valuation dispute may each decide to retain their own business valuation expert. Alternatively, the parties may decide to jointly retain an expert. In a joint retainer situation, the expert must analyze the issues involved objectively and assist in negotiating a settlement agreement. To accomplish this result, the expert interviews all parties involved and usually performs due diligence procedures to render a complete opinion of value. A complete opinion entails a level of diligence above and beyond that of the preliminary assessment described above, and is prepared to withstand third-party scrutiny in deposition and trial. Depending on the level of reporting desired, the expert's results may be provided to both parties as an oral opinion, letter opinion, a short format report, or a full narrative report.


Jointly hiring a single valuation expert to resolve a dispute outside of the courtroom can create numerous benefits to the shareholders. When a single expert is used, the shareholders bear substantially lower professional fees, management and staff do not have to commit as much time to provide the necessary due diligence items to the expert, and the valuation results are provided expeditiously.



Valuation Opinions for Litigation


If the dissenting shareholders cannot reach a settlement, proceeding with litigation may be the only alternative. Once the dispute is taken to court, a business valuation expert should be retained to perform a complete opinion of value, as described above.


To provide a complete opinion of value for litigation, the expert analyzes the company and its operations, industry, market, competitive, and economic factors. In addition, the expert typically interviews key employees and management and reviews any other pertinent appraisals, such as real estate appraisals. The level of reporting (oral, letter or full report) often depends on the case's court jurisdiction.



Conclusion


Retaining a business valuation expert during the pre-litigation phase of a business valuation dispute often results in an economical resolution to the dispute. If, however, the matter fails to settle and proceeds to trial, a business valuation expert can assist by performing a full due diligence valuation to present crucial evidence in the court proceedings.




For more information on resolving disputes involving business valuation issues, please contact Tom Pastore at (310) 571-3400 or tpastore@sphvalue.com.

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