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  • Writer's pictureAchille Ekeu, MBA, CVA

Business Valuation In Shareholders' Dispute Cases

Updated: Jun 15, 2023

Shareholders in a tense dispute.

Introduction: Complex and emotionally charged shareholder conflicts have the potential to seriously impair business operations and interpersonal relationships. In these controversial contexts, business valuation plays a crucial role in settling ownership disputes or determining an equitable division of assets. Throughout my work as a business valuation specialist, I have dealt with several shareholder conflicts. This blog will focus on the finer points of valuations for shareholder disputes, to assist interested parties in negotiating through potentially contentious situations. Dissecting the Roots of Shareholder Disputes:

Disputes among shareholders can emerge for many different reasons, including divergent goals, issues with management, breaches of fiduciary duties, and disagreements during mergers and acquisitions. For this reason, the valuation procedure must be adjusted for each disagreement. To choose the right valuation strategy, it is essential to understand the fundamental concerns and goals of the concerned parties. How to Pick a Good Valuation Approach:

In circumstances involving shareholder disputes, picking the right valuation approach is crucial. The market approach, the income approach, and the asset-based approach are often used strategies. The market strategy involves contrasting the company under consideration with related publicly traded companies or recent acquisitions. The income approach evaluates a corporation based on its expected future profits, which are based on several variables. The net worth of a business is calculated using an asset-based valuation method that takes into account both fixed and variable assets. Considerations such as industry standards, the stage of the company's life cycle, and the availability of accurate data should inform the selection of a methodology.

Analyzing Financial Statements: Valuing a corporation amid a shareholder dispute requires an in-depth examination of the company's financial statements. For insight into the company's past performance, current financial health, and prospective hazards, the valuation expert should review the balance sheet, income statement, and cash flow statement. Profitability, liquidity, and solvency ratios are only a few of the key financial statistics that should be analyzed to gain insight into the company's operational efficiency and financial health.

Normalizing Financials:

When valuing a company as part of a shareholder dispute, it's essential to normalize the numbers so that unusual or one-time events don't skew the numbers. One-time costs, transactions not conducted at arm's length, excessive owner remuneration, and non-operating assets and liabilities may necessitate reclassification. The purpose is to provide an honest assessment of the company's financial standing and performance.

Considering Minority and Control Interests:

When dealing with minority shareholders, it is crucial to remember the distinction between minority and control interests. Minority shareholders often have little say in major company decisions and access to fewer firm resources. To effectively reflect the minority stake, the valuation expert must take into account these factors and estimate a suitable discount or premium. Similarly, an expert should evaluate the premium associated with the capacity to influence the operations and strategic direction of a company when assessing a controlling interest. Valuing Synergies and Strategic Opportunities for the Company:

Synergies and strategic opportunities may increase the value of a company, which may be relevant in shareholder conflicts. The existence of synergistic value indicates that the company under consideration has the potential to increase its value by entering into a strategic alliance with, acquiring, or integrating another business. An expert in business valuation should think carefully about how these synergies might affect the company's worth. Courtroom Testimony as an Expert Witness:

The valuation expert may be asked to testify as a court-appointed expert witness in shareholder dispute situations. The expert's impartiality, trustworthiness, and professionalism must be unwavering throughout the entire procedure. Expert testimony should be founded on reliable procedures, a thorough investigation, and openly disclosed assumptions. The expert needs to be able to both understand and explain difficult valuation ideas to opposing counsel during cross-examination.

Mediation and Alternative Dispute Resolution: Alternative dispute resolution techniques, including mediation, can save time and money in shareholder conflicts. Mediation and other forms of alternative dispute resolution (ADR), such as arbitration or negotiation, can provide a quicker and more agreeable settlement in certain situations. Valuation experts can help tremendously by giving objective assessments and fostering fruitful dialogue among the many parties involved.

Conclusion: A thorough understanding of the financial and non-financial aspects of the firm, as well as the ability to traverse complicated legal and emotional issues, are essential for generating accurate valuations in shareholder disputes. Stakeholders can approach the valuation process with clarity and confidence by carefully evaluating the critical aspects highlighted in this article, leading to fair and equitable resolutions. To achieve a thorough and robust study that is suited to the specific circumstances of the shareholder dispute, it is essential to seek the counsel of an experienced valuation specialist.

The Washington Valuation Group

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