When groups of businesses are restructuring or are changing hands, they often call in professional advisors to aid in carving up privately run businesses. For example, if a shareholder made the decision to leave and sell their shares, both the departing and remaining shareholders may seek advice on what the best next steps are.
For the parties involved, the process of obtaining separate valuations may yield varying results which can leave one or more of the parties feeling short-changed. To alleviate those feelings and save on needless costs, the shareholders who are affected may contemplate appointing one independent valuation expert. But how do they choose the best person for the job and how can they be confident that the valuation the expert provides is appropriate?
What should you consider when valuing a business?
Valuing a business is an art more than a science, as there are many factors to consider, and there is never only one correct answer. When valuing a business it is important to take into account key financial data, such as earnings before interest, tax, depreciation and amortisation (EBITDA). There are also other factors that should be examined such as the asset value, cash flow and performance trends of the business.
Even factors that are less tangible can also impact a valuation, such as what type of business the company is and the market that it operates in. If applicable, the rights of intellectual property and the requirements outlined in the Articles of Association and Shareholder Agreement must also be reviewed during the valuation.
When could a valuation be required?
Death, divorce or family situation
Frequent triggers for a business valuation are if a shareholder leaves due to a death, divorce, or another family situation. Under these circumstances, a valuation is required to ascertain the sum of money that the prospective shareholder will have to pay the departing shareholder or their estate, subject to the assessment of the value of their portion of the company that can be unanimously agreed upon by the parties involved.
Alleged unfair prejudice
Another possible situation of where a business valuation may be required is in the case of an alleged unfair prejudice. This occurs when a majority shareholder, or several shareholders who constitute a majority, is endeavouring to exclude a minority shareholder or reduce their influence. For example, by guaranteeing that the minority shareholder does not receive a dividend, or alternatively excluding the minority shareholder from participating in business decisions. A commonly used solution for a claim of unfair prejudice is for someone else to buy out the minority shareholder at a fair value (excluding any minority discounts that would otherwise apply), therefore requiring an independent business valuation to confirm that the fair value is ascertained and can be agreed upon by the existing shareholders.
How can an independent valuation reduce the time and costs of a dispute?
In most cases, every party involved in the dispute will acquire their own valuation with the goal of reaching an agreement. However, business valuations conducted by different experts are very unlikely to result in the same amount, so additional negotiations are almost always needed, which can lengthen the process and make the situation more stressful for those concerned. Appointing a single expert would reduce the costs and the risk of a protracted argument about the valuation aspects of the dispute.
Although joint independent valuations are unable to avoid the risk of disputes completely, they should help to bring the matter to a close in a shorter time frame. In circumstances that allow it, shareholders, or other parties involved in a dispute about a shareholding, should consider appointing an independent valuer with the appropriate background in terms of their experience in the subject matter and someone or a team familiar with the process of acting as a single joint expert.
Establishing an understandable process and timetable for collecting information and input from the business, the timeline for producing the valuation and identifying any queries arising will ensure that shareholders know what to expect and when, allowing them to make better informed choices.
Shareholder disputes are usually challenging for those involved but employing an independent business valuer can reduce stress and result in improved outcomes for all concerned.
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