When business owners are embroiled in conflict, a valuation can be instrumental in paving the way to a resolution.
It is important to understand that states generally have unique views on business valuations in business break-ups. These views are largely shaped by case law. For instance, in a New Jersey shareholder dispute, business valuators find guidance on whether to apply discounts from two cases in particular, Balsamides v. Protameen Chemicals, Inc. and Lawson Mardon Wheaton, Inc. v. Smith.
Both cases provide guidance on valuation discounts largely based upon the actions of the parties. The Balsamides Court found that the oppressor, the “bad actor”, should not be rewarded for his conduct by allowing a buy out at a discounted price. In certain cases, where the courts have not made a determination as to the “bad actor(s)”, we are sometimes asked to provide a valuation with and without discounts. Since discounts for lack of marketability (DLOM) and discounts for lack of control (DLOC) can in combination reduce the value of the business by 30 percent or more, the determination of the “bad actor” is a very important factor indeed.
Partnerships can be especially challenging to value. Unlike a corporation, where the valuator would take an entity approach, in a partnership the valuator must analyze each individual partner’s ownership under an aggregate theory of business ownership. Under the aggregate theory of business ownership, 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.
In an owner dispute, as with any other valuations, there are three valuation approaches that should generally be considered:
- The income approach – focuses primarily on the actual cash flow available to the investors.The greater the anticipated future cash flow, the greater the value.
- The asset approach – the valuator considers the fair market value of the individual assets, minus liabilities.In this case the subject company might be worth more dead than alive.
- The market approach – provides ballpark figures based on the prices that similar companies have actually been sold.
The resulting valuation report should discuss the applicability of each approach and the impact on the final value.