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7 Reasons a Business Valuation is Necessary in Litigation.

Friday, August 22, 2014

There are times in litigation matters, when a company or an investor in a company may be required to have a business valuation performed.

1.  Litigation involving a shareholder dispute or dispute between partners in a company requires a business valuation be performed to determine either a) the fair equity value of the overall company (dissenting shareholder action) or b) the fair market value of the shareholder/partnership interest(s) in the business.  If a shareholder has the court approve the dispute as a dissenting shareholder action, then the standard of value is fair value and discounts for lack of control and lack of marketability would not be taken into consideration.

2.  A company's single largest asset may be its intellectual property.  It may be necessary to determine appropriate damages for breach of IP in a litigation matter.  Damages could arise for lost profits, royalties or diminution of value.  IP disputes are common but most cases settle.  Having a business valuation performed early in the case often helps in negotiating a fair settlement.

3.  A company going through a bankruptcy may have to have the business assets valued to establish their value as of the time the bankruptcy occurred.  Depending on the purpose, the standard of value could vary from a) fair market value, what the business would sell for on the open market, to b) liquidation value, a lower standard that determines what the business assets would go for in an auction sale. 

4.  In a dissolution matter that involves a business owner, a business valuation is required to resolve the complex issues.  The issues typically focus on the intangible assets which include discrete intangible assets (intellectual property (IP)) and non-discrete intangible assets (goodwill - which may consist of professional or personal goodwill value).  Additionally, if the business owner is a minority interest, then applicable discounts for lack of control and lack of marketability may be an issue.

5.  An ESOP (Employee Stock Ownership Plan) trustee is required to have a business valuation performed annually to determine the per share value of the stock in the company held by the ESOP. The trustee of the ESOP Plan is required to have an independent valuation performed, review the valuation, determine the adequacy of the valuation methodologies and ultimately decide the per share value for the stock in the company.  Litigation could arise over whether the stock was valued correctly.

6.  If a gift or estate tax return is audited, an issue may focus on the value of the interests that were the subject of the valuation.  The valuation has to provide compelling support and defensible positions for the conclusions of value and the discounts for lack of control and lack of marketability taken.  Or, the valuation has to be able to defend the lack of discounts for lack of control and/or lack of marketability, if it is seeking a step up in basis.

7.  If a litigation arises around the value of capital assets, it is important to be able to objectively value the capital assets applying the appropriate standard of value, using the appropriate methodologies and providing compelling support for the conclusions of value.

In all of the above situations, it is important to work with an impartial valuation company who will be the advocate for the value.