Michael B. Lehner, CPA/ABV, CFE, ASA
business valuation hidden assets unreported income
In search of unreported income
September 17, 2016
business valuation
What’s normal? – The ins and outs of business valuation adjustments
March 20, 2017

Settling shareholder disputes

shareholder disputes

Download Printable PDF

A company’s owners tend to get along when times are good, but economic downturns can bring out the worst in shareholder relations. For instance, minority shareholders might suspect controlling shareholders of withholding dividends or financial information. Siblings might disagree about the appropriate strategy for their family business. Or a creative partner might violate his noncompete agreement by diverting intellectual property to another business in which he’s the sole owner.

Valuators can help settle shareholder disputes — both in and out of court — allowing the remaining owners to refocus their attention on building and preserving value.

Case in point

Let’s look at a fictional scenario representative of many real-life ones that have been playing out over the last couple of years: When Felix and Oscar went into business in 2000, they thought it was a perfect marriage. Felix, who was disciplined and organized, handled finance, production and human resources chores. Creative and charismatic Oscar focused on product development, marketing and sales. Everything ran smoothly until the recession caused the company to miss its sales and profit goals.

Oscar decided Felix’s conservative ways were hampering growth. Felix accused Oscar of lavish R&D and entertainment spending. Their constant bickering caused several key managers to resign. Both partners wanted to dissolve the company but couldn’t agree on buyout terms.

Their attorney recommended hiring a valuation professional to sort out the details. The first step was an appraisal. The valuator analyzed future cash flows and provided several real-life comparable transactions to support his estimate. Then he provided recommendations regarding the timing and structure of a potential buyout to maximize cash flow, minimize taxes and comply with the shareholder agreement.

Felix and Oscar were surprised to discover that, in the current economy, their business wasn’t worth much more than book value. After objectively evaluating the facts, the frustrated owners decided it made more sense financially to stay “married.” Leveraging the valuator’s industry know-how and his financial analyses, the partners compromised and collaborated to achieve a mutually agreeable turnaround plan. Today, the business is on the road to recovery.

Irreconcilable differences

Of course, not all shareholder disputes end on a positive note. Sometimes owners contemplate legal action. A valuator can help determine whether it’s financially feasible to pursue a case. Hiring a valuator as soon in the process as possible improves the efficacy of discovery, increases the likelihood of out-of-court settlement and provides adequate time for the expert to perform a comprehensive analysis.

Valuators often serve as expert witnesses in shareholder litigation. A valuation expert might provide testimony concerning:

  • The fair market value of the business, including the fair value of each shareholder’s interest,
  • Economic damages, including temporary lost profits and diminution in business value,
  • Formal rebuttal of an opposing expert’s conclusions,
  • Reasonable compensation for shareholder-employees, and
  • Appropriate discounts for lack of control and marketability, depending on relevant legal precedent.

A valuator also may serve as consultant, helping the attorney critique the opposing expert’s report and prepare questions for deposition and trial. But a valuator shouldn’t serve as both expert witness and consultant on the same case. Keeping these roles separate helps prevent a valuator from being perceived as a “hired gun” by judges, juries and mediators.

Unbiased support

Shareholders often butt heads, whether it’s about past events or a business’s future direction. When differences of opinion impair performance, it’s time to call for professional advice. Valuators are objective outsiders who can defuse emotions and refocus the parties’ attention on the cold, hard financial facts.

Michael Lehner

This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. In addition, any discounts are used for illustrative purposes and do not purport to be specific recommendations.