Partnership and shareholder disputes turn on what an ownership interest is worth and whether the business's earnings have been fairly shared. The economist values the interest under the standard of value that applies to the claim, analyzes the distributions, compensation, and related-party dealings in the financial records, and states the conclusions with the methods and assumptions laid out so they can be examined.
In short
Depending on the claim, the analysis consists of the fair value or fair market value of the ownership interest as of the relevant date, the difference between what the departing owner received and what the interest was worth, distributions or profits diverted through excess compensation, related-party transactions, or unrecorded revenue, and lost profits to the business or to the owner when the conduct at issue reduced earnings. The drivers are the operating agreement or shareholder agreement and its buyout terms, historical financial statements and tax returns, the general ledger, compensation and distribution records, and documentation of transactions with related entities.
The valuation date and the standard of value control the result: a fair value standard may exclude the minority and marketability discounts that a fair market value standard applies, and the gap between the two can be substantial for a minority interest in a closely held company. Normalizing adjustments to owner compensation and related-party dealings often decide whether the business shows earnings to value at all. Where the claim includes diverted profits, the amount depends on how far back the records permit reconstruction and on whether the business's actual results can be separated from market conditions.
The economist reviews the agreements to identify the valuation date, the standard of value, and any buyout formula, then normalizes the financial statements for owner compensation, related-party transactions, and non-recurring items. The interest is valued using the income, market, and asset approaches as the facts support, with the weighting and any discounts or premiums explained. Where profits were diverted, the report traces the transactions through the ledger and bank records and quantifies the amounts by year. The result is presented as a value or a damages figure tied to the agreements and the records, with the effect of the principal assumptions shown.
Stage-by-stage guidance on working with a forensic economist in partnership and shareholder dispute litigation.
It depends on the claim and the governing framework counsel identifies. Buyout and oppression claims often use a fair value standard, while agreements may specify fair market value or a formula. The economist values the interest under the standard counsel identifies and can show the result under alternatives.
The economist compares the compensation paid with market compensation for the role and treats the excess, along with personal expenses run through the business, as normalizing adjustments to earnings. The same analysis quantifies diverted profits when that is part of the claim.
The financial records are reconstructed to trace distributions, related-party payments, and unusual transactions, and the amounts are summarized by year and recipient. Where records are incomplete, the report states what could and could not be determined.
Yes. Where the agreement specifies a formula, the economist applies it to the financial records as of the relevant date and, if counsel asks, compares the formula result with the value under the applicable standard so the difference is quantified.
Request a consultation on partnership and shareholder dispute cases or call (201) 343-0700. Plaintiff and defense counsel.