Jan 12

Valuation in Business Disputes

Most Shareholder Agreements or Buy-Sell Agreements are Poorly Designed

  • Often rely upon old Value
  • Unclear Definition of Value Standard
  • No Definition of Whether Discounts Apply
  • Vague Process for Getting Values and Resolving a Final Value
  • Lack of Clear Process Can Lead to Adversarial Situation Occurring Outside of Legal System

Buy-Sell Agreement Valuations

  • Methods
    • Agreed upon Price
    • Formula tied to Revenue or Earnings
    • Valuation Process at Time of Dispute/Departure
  • Standard of Value
    • Fair Market Value
    • Fair Value
    • Other
    • Will Depend upon State of Incorporation if Not Clearly Defined in Agreement

Key Elements to Agreements

  • Determination of As of Date for Valuation
  • Source of Financials to be used
  • Rules on Sharing Information with Appraisers
  • What Valuation Adjustments Allowable
  • Process Timeframe
  • Standard of Value
  • Explicit Statement about Discounts
  • Qualifications of Appraiser
  • Who Bears the Cost?

Valuation Best Practices

  • Agreement Should Require Current Value Determination
  • Size of Firm Should Determine Whether to Specify Single or Multiple Appraisal Approach
  • Multiple Appraiser Approach:
    • Specify the Process and Value Resolution Carefully
    • Require Information Shared with Both Parties
    • Require Management Interviews Done Jointly
      • Spell out Value Standard ? Do not Leave to State
  • Law or Judicial Findings
    • Specify Timeframe for Payment and Funding Source

Source: Roger, our valuation expert of choice