The role of the independent valuer to avoid protracted disputes

By Georgina Davis and Matthew Haddow, share valuations experts at accountancy firm, Menzies LLP

Professional advisers are often called in to help carve up privately run businesses that are restructuring or otherwise changing shape. For example, if a shareholder has decided to exit and sell their shares, both the exiting and remaining shareholders may need advice on what to do next.

For the parties involved, the practice of sourcing multiple business valuations that produce different outcomes can exacerbate feelings of unfairness. To mitigate this and save on unnecessary costs, the shareholders involved may consider jointly appointing an independent valuation expert. But who should they choose and how can they be sure that the valuation they provide is appropriate?

It is often said that business valuations are an art rather than a science, because there are many variables to examine, and there is never a single ‘correct’ answer. Although key financial data, such as earnings before interest, tax, depreciation and amortisation (EBITDA) should be taken into account when valuing a business, they are not the only factors. The asset value, cash flow and performance trends are also important considerations. Less tangible factors can also influence a valuation, such as the type of business and the market it is operating in. Intellectual property rights and the requirements of the Articles of Association and Shareholder Agreement, if applicable, must also be reviewed.

Common triggers for a business valuation are a shareholder exit due to a death, divorce, or another family circumstance. In these situations, a valuation is needed to determine the amount that the prospective shareholder will pay the exiting shareholder or their estate, based on an assessment of the value of their shareholding that can be agreed by the parties concerned.

Another example of a situation where a business valuation may become necessary is a case of alleged unfair prejudice. This is where a majority shareholder, or a group of shareholders that makes up a majority, is attempting to drive out a minority shareholder or limit their influence. For example, by ensuring the minority shareholder does not receive dividend payments when they think they should have, or otherwise excluding the minority shareholder from business decisions in the knowledge that their votes have no influence. The most common remedy to a claim for unfair prejudice is for the minority shareholder to be bought out at fair value (excluding minority discounts that might otherwise apply), thereby requiring an independent business valuation to ensure that the fair value is ascertained and can be relied upon by all parties.

In the majority of cases, each of the parties involved in a dispute will obtain their own valuation with the aim of reaching an agreement. However, it is unlikely that business valuations undertaken by different experts will result in the same figure, so further negotiations will almost always be needed, which can draw things out and make the situation more stressful for those concerned. Appointing a single joint expert may reduce costs and reduce the risk of a protracted debate about the valuation aspects of the dispute.

Whilst joint independent valuations can’t avoid the risk of disputes entirely, they can introduce greater transparency and shareholders are more likely to feel that they are receiving an unbiased view. This can help to draw a line under the matter. Where possible, shareholders, or other parties to a dispute about a shareholding, should look to appoint an independent valuer with the right background in terms of their experience of the subject matter, process and circumstances.

Establishing a clear process for obtaining information and input from the business, the timetable for producing the valuation and addressing any queries arising will ensure that shareholders know what to expect and when, enabling them to make informed choices.

Shareholder disputes are often challenging for those involved but obtaining an independent business valuation can minimise stress and improve outcomes for all concerned.