Business valuation applied to partnership and shareholder dispute litigation: methodology, deliverables, and case-specific considerations.
In a partnership or shareholder dispute the valuation turns on the valuation date, the standard of value, and any buyout formula in the operating or shareholder agreement. The economist reviews the agreements to fix those terms, normalizes the financial statements for owner compensation, related-party transactions, and non-recurring items, and values the interest using the income, market, and asset approaches as the facts support. Because a fair value standard may exclude the minority and marketability discounts that fair market value applies, the report states the standard used and can show the result under the alternative so the difference is quantified rather than argued.
Valuation of closely held businesses and ownership interests for shareholder and partnership disputes, divorce, estate and gift matters, and buy-sell disagreements. The work applies the income, market, and asset approaches under the standard of value that governs the matter, addresses discounts for lack of control and marketability where they apply, and documents every input so the conclusion can be tested on cross-examination.
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.
We issue the final report and provide deposition and trial testimony and critique of opposing valuation reports.
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.
As normalizing adjustments to earnings. 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 adjustments that restore the earnings the business would show under arm's-length management.
Request a consultation on Business Valuation or call (201) 343-0700. Plaintiff and defense counsel.