Why an Independent Business Valuation is Crucial in Shareholder Disputes

When a shareholder in a business looks to exit, it can often lead to disputes in how much they are owed. This is where an independent business valuation is needed.

If one party wants out and the other disagrees on the amount due to the departing partner, only an unbiased and fair valuation can anchor negotiations to allow everybody to move forward.

We’ll look at how to obtain an independent business valuation, as well as how it helps during different stages of a business exit, and the common pitfalls you’ll need to be aware of to ensure a smooth process for all.

Why do shareholder exits turn into disputes?

Unfortunately, when money is involved even the most solid partnership can be tested.

Nine times out of ten we’ve found that any shareholder dispute we encounter is a disagreement about price. A shareholder’s exit can sadly sour relations rather quickly as warring parties argue over the value of the shares.

It’s a difficult dispute to avoid: the departing shareholder thinks they’re owed more than they’ve been offered, and the remaining shareholders think the selling party is asking for too much. Business valuations are fluid and subjective to a point, making it difficult to find a figure for everyone to agree on.

What an independent valuation provides

This is exactly the scenario in which an independent valuation is crucial to enable everybody to move forward.

By providing a defensible, non-biased figure that neither side controls, an independent valuation creates an anchor to base all other negotiations around. If both parties agree to adhere to the valuation beforehand, such services become binding and can move disputes on from frustrating stalemates to prompt exits.

Some services (such as our own) can also help both parties to structure a buyout deal. It’s not always possible to provide a lump sum of money at short notice without harming the business. By structuring any deal responsibly, businesses in such a position may be able to pay in easier instalments if that make it more likely that the seller will receive all of their money rather than seeing the business fail and only receive a portion of what they’re owed.

Without that independent valuation to base everything around first though, negotiations are worthless. Once a figure has been agreed on, all parties can begin to move forward with a solution that suits all.

How an independent valuation helps at each stage of a shareholder buyout

At negotiation stage

At the negotiation stage, an independent valuation is essential. There are myriad methods that can be used to value a business, and without an unbiased third party’s valuation, both parties are likely to just use the method that is most beneficially financially for them. This leads to lengthy disagreements that drag on and go nowhere.

An independent valuation also takes emotion completely out of the picture. When shareholders are at odds with one another, egos can get involved and parties can become upset. This can have an effect on the prices suggested from both sides, whether consciously or not.

During mediation and settlement

Independent valuations speed up the mediation and settlement processes significantly. Having a figure that everyone has agreed to honour to base everything around makes sorting out any deal structure far more straightforward. In fact, it’s difficult to even get to this point without one.

Without an agreed upon figure, it’s common for this stage of an exit to escalate into court. As you might imagine, once solicitors are involved on both sides, the process can not only become rather costly but also come to a standstill.

In litigation

Should a case still end up in court for whatever reason though, an independent valuation can serve as expert evidence. For example, it could support an unfair prejudice claim under the Companies Act 2006.

Common pitfalls to avoid

An independent valuation shields all parties from some of the most common pitfalls in shareholder disputes.

Valuation date disputes

A company’s valuation is never set in stone for long. As market conditions, internal factors, and competition change, a company’s value changes alongside it.

As such, a valuation you had a year ago may be completely out of date now. Think about your business value like the price of a full tank of petrol. The price of a full tank can vary wildly if there’s overseas conflict, a change in competition for petrol stations nearby, or you’re filling up a different car to before. You can only base negotiations around a fresh figure as there are too many potential variables to affect the value.

Minority and marketability discounts

While 30% of a £1m business should equate to £300,000 for anyone selling it, the fact that 30% ownership wouldn’t have executive powers to set dividends, sell up, or change strategy can devalue such shares in some cases.

Equally, the illiquid nature of the shares if there are no other interested parties can tempt some buyers to offer much lower, knowing that there are no other options available to the seller.

Both of these factors can be abused somewhat in a dispute without independent mediation.

Using an informal valuation

Using an informal valuation is unlikely to see negotiations get very far, but on the rare occasion that it might, you’ll find that any deal is resting on an incredibly flimsy foundation. All it takes to derail the entire negotiation is one party suddenly disagreeing on the valuation.

Shareholder buyout becoming tricky?

Forbes Burton provides shareholder dispute resolution services that offer independent valuations and binding agreements that all parties are happy with.

Shareholder disputes can have a detrimental effect on your business if allowed to trundle on for too long. Speak to one of our advisors today on 0800 060 8446 or email advice@forbesburton.com to get everything sorted promptly and professionally.