Business Valuation for Owner DisputesFebruary 13, 2018
By: Roy Kvalo, CPA/ABV/CFF, CVA
When two or more business owners are embroiled in conflict, a valuation can pave the way to a resolution. Specializing in business valuation and litigation, The Curchin Group has helped resolve this type of situation many times and can offer a bit of insight that might be helpful to you if you ever find yourself in a dispute with a co-owner or partner in your company.
The CPA’s Role in Business Valuation and Litigation
In any ownership dispute, the attorney is the quarterback. The CPA’s job is first to communicate with both the attorney and the client to set the stage for effective, efficient communication. Only then can we begin to strategize on how we want to go about the valuation (which we’ll discuss shortly in a little more detail).
What We Need to Know
The questions you can expect your CPA to ask in the first discussion include:
- In what court will the case be tried?
- What type of entity are we dealing with?
- What ownership agreements are in place?
- What guidance do the ownership agreements provide in relation to dissolution?
- Who is retaining us and who will be responsible for billings?
- What is the approximate timeline from discovery through trial?
Partnerships and LLCs can be especially challenging to value, because instead of taking an entity approach as we would for a corporation, we must analyze each individual partners ownership under an aggregate theory of business ownership. In the analysis, each partner is viewed as a separate business unit, and each partner’s business activities are separately accounted for through use of capital accounts, in order to arrive at each partner’s relative share of the whole.
Establishing who we are working for is particularly critical up front, especially considering the owners are in general disagreement. Occasionally, it makes sense for the attorney to retain us, but often, we utilize an engagement letter that appropriately assigns responsibility to the client for all CPA billings.
In a New Jersey shareholder dispute, we must consider two cases in particular:
- Balsamides v. Protameen Chemicals, Inc. , 160 N.J. 352 (1999)
- Lawson Mardon Wheaton, Inc. v. Smith , 160 N.J. 383 (1999)
Without going into the weeds, we will say that both of these provide guidance on whether or not it would be appropriate to apply marketability and minority discounts on value, in other words whether the valuation should be calculated under the fair value (FV) or fair market value (FMV) standard. In certain cases we are asked to provide both a FV and FMV valuation.
The valuation requires us to gather in-depth analysis of:
- Business operations
- Financial data
- Industry and market data
- Input from management
- Input from other key personnel
You may be familiar with the three general types of valuation approaches: the income approach, asset approach and market approach. The income approach focuses primarily on cash flow, while the asset approach considers the net asset value (assets minus liabilities). The market approach can offer ballpark figures based on what similar companies are selling for. However, for many small businesses, the market approach is best taken with a grain of salt, as the ranges can be extremely wide and misleading.
In conjunction with the valuation, we determine whether discounts for lack of marketability and/or lack of control would be applicable, to reflect fair value and/or fair market value. Remember, the primary difference between the two is generally in the discounts.
This is only a short-form outline of a business valuation in an owner dispute. To learn more, contact The Curchin Group at 732-747-0500.
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