There are a number of different reasons why a business valuation for a specific company might be required, including a few you may not have considered very closely. One good example here, which happens more often than you might realize: When a business valuation is needed for an ownership dispute over that business.
At My Biz Value, we’re happy to offer the very best business valuation services around to those in need of such services for any reason — when buying or selling a business, yes, but also in other situations like ownership disputes over existing businesses. What are some of the kinds of ownership classifications that may require a valuation, and what important roles does such a valuation carry during this process? Here’s a simple primer.
Kinds of Business Ownership Disputes
Sadly, there are a number of different ownership disputes that may arise in some businesses. The kind of dispute present may have an impact on the sort of valuation process that’s carried out, so it’s important to understand some of the basics here.
In many cases, an ownership dispute will come down to a single individual asserting that they have more ownership stake in a business than what’s currently being recognized. In such cases, a business valuation may be used as evidence to back up this claim and help support it accordingly.
If there are two or more individuals on different sides of an ownership dispute, a business valuation can be used as a way to help determine what each side’s share of the business may be worth — and, in turn, how best to divide up ownership (or buy out one side from the other) in order to reach a resolution.
Of course, it’s also possible for there to be more than two sides to an ownership dispute. In cases where there are multiple shareholders all asserting different levels of ownership stake, a business valuation can help create a clear picture of what the company is worth and how best to divvy it up between these different parties.
Generally speaking, though, here are some common trigger events for ownership disputes:
- Deceptive business practices among partners or shareholders
- One partner or shareholder attempting to forcefully buy out another’s stake in the company
- One partner or shareholder being accused of breaching their fiduciary duty to the company or other shareholders
- The death of a business owner, which may lead to different family members asserting ownership rights
Importance of Quality Methodology
During any such situation of ownership dispute, a business valuation professional may be called in to provide an expert opinion on the matter at hand. It’s important that this valuation is carried out using only the most reliable and trusted methodology, as the results of the valuation will be used to help determine how to settle the dispute — meaning any errors in methodology may have very real consequences down the road.
One of the first key steps here is identifying the ideal methodology to apply to a given business valuation. This will vary depending on the specifics of each business being valued, but some common methodologies used during ownership disputes include the asset approach (when the business’ tangible assets are valued and used to determine ownership stake), the market approach (when comparable sales data from similar businesses is used to value the business in question) and the income approach (which assesses what the business may be worth based on its current and projected future earnings potential).
After the ideal methodology has been selected, it’s important to gather all of the necessary data that will be used during the valuation process. This data may come from a variety of sources, including financial statements, tax returns, industry reports, business appraisals and more. Once this data has been gathered, it can then be analyzed using the selected methodology in order to arrive at an accurate estimate of the business value.
Fair Value Versus Fair Market Value
These two terms may seem identical to the untrained eye, but in the realm of business valuation, they are not the same. The term \”fair value\” is used to describe the value of a business interest based on what would be considered reasonable under the circumstances — meaning, if two unrelated and informed parties were to negotiate a deal for this business interest, what sort of value would be considered fair given all that is known about the business?
On the other hand, \”fair market value\” takes things one step further. This term is used to describe the value of a business interest that would be agreed upon by two knowledgeable and willing parties — meaning, what sort of value would these parties come to if they were trying to negotiate a deal for this business interest under typical market conditions?
In cases of ownership dispute, fair market value is generally used as the standard, as it provides a more objective way to value the business in question.
Risks of No Valuation
If those involved in a business ownership dispute fail to commission a professional valuation, there are a number of risks that could come into play. For one thing, this could lead to an unfair or one-sided settlement, as those without a clear understanding of business valuation methodologies may be at a disadvantage when it comes to negotiating a fair deal.
In addition, not having a professional valuation done may also lead to a prolonged legal battle, as both sides may be unwilling to budge on their respective positions without some sort of objective third-party opinion to provide guidance.
Finally, not commissioning a business valuation may also give one side or the other an unfair advantage in court, as the lack of a valuation could be used as evidence that this party was not acting in good faith during the negotiation process.
For more on how business valuations play a role in many ownership disputes, or to learn about any of our business valuation services, speak to the team at My Biz Value today.