The valuation of a closely-held business is complex. Professional business valuators must consider a multitude of factors when performing a business valuation. The economy, the subject industry, the company’s cash flows, risk factors, and a host of other quantitative and qualitative considerations need to be addressed to formulate a reliable, credible opinion as to the value of the underlying business. When business value is disputed in a litigation matter (e.g., domestic cases, commercial disputes, owner discord, tax matters, etc.), the complexity of the valuation process can be compounded, given the adversarial nature of the legal process.
If you are a party to a lawsuit with the value of a business ownership interest in dispute (or you are serving as legal counsel to such a party), it is wise to give consideration to consulting with a professional business valuator. Why? You will improve your chances of success in reaching a fair outcome. A credible, impartial business valuator can assist the parties, counsel and the trier of fact (e.g., judge or jury) in understanding complex methods and approaches employed in valuing a business. Furthermore, the valuator can explain how the specific facts of the case impact the process of determining the value of the business. For example, the valuator can speak to the following issues:
- Standard of value (e.g., fair market value, fair value) – The standard of value forms the foundation of the business valuation. The business valuator and your legal counsel can work together to determine the proper standard of value for your case.
- Methods of valuation – There is no “one-size-fits-all” approach to valuing businesses. The valuator must consider all of the approaches available (e.g., asset approach, income approach and market approach) in developing an estimate of value.
- Premiums and discounts (e.g., marketability and control) – The applicability of premiums and discounts in your case can dramatically impact the estimate of value of the ownership interest being valued. It is important that you, your legal counsel and the trier of fact understand whether these discounts and premiums apply and that, when applied, they are adequately supported.
Litigation-based valuation engagements can be further complicated by the information available to (or, in some cases withheld from) the valuator. For instance, the valuator may not have direct and unfettered access to key management personnel. In addition, there may not be a free flow of information between the parties in a disputed matter for a variety of reasons. Because of these limitations, the valuation of a business can be more challenging in a litigation context. However, a skilled valuator can assist you and your legal counsel in requesting and securing the necessary documents to complete a supportable conclusion. Gathering sufficient information is critical to your success in reaching your desired outcome in a disputed matter – a business valuator can help in making sure that the discovery process is effective.
Finally, the valuator’s work is not complete until he communicates the results of his analysis. The valuator’s role in this regard is two-fold. First, the valuator issues a written report disclosing his findings and conclusions. Depending on a variety of factors, the valuator is bound by certain legal and professional requirements in issuing a report in a litigation context. Once again, your valuator and legal counsel can work together to ensure all the relevant compliance issues are met. Second, the valuator may be called upon to offer testimony at deposition and/or trial. This is perhaps the most important role that your expert can fulfill. Of course, a credible expert is not an advocate of either party. Rather, the expert is an advocate for his or her opinions. In this way, an effective expert possesses strong presentation skills and the ability to clearly communicate the results of his or her work. You can learn more about what makes a strong expert witness here (https://skodaminotti.com/blog/credibility-in-expert-testimony/).
There are many landmines in litigation that can be complicated in matters that involve the valuation of a closely held business. If you are facing a dispute where value is in question, it is wise to consider utilizing a seasoned and credible business valuation specialist with experience in litigated matters to assist you and your legal counsel through the process.