Split Smart: Understand What Your Stake is Really Worth

At a Glance

• Business valuation often becomes a contentious issue in conflicts or disputes.
• Independent experts provide defensible, objective valuations – especially important where values are contested or manipulation is suspected.
• Consider the costs and potential benefits specific to your case. In high-value disputes, the benefits could far outweigh the expense.
• Key attributes to look for when selecting an expert.  

Knowing the Value of Your Business

When relationships break, whether between business partners or spouses, the golden question often becomes: What is it worth?

In shareholder disputes and minority oppression cases, the value of a party’s stake in the business often becomes the central point of contention in a share buy out. In divorce proceedings, a privately held business may need to be independently appraised before matrimonial assets can be fairly divided.

In both situations, what begins as a simple question of value can quickly evolve into a technical battleground, with parties debating the validity of assumptions, the reliability of historical data, and the appropriateness of valuation methods in an effort to shape an outcome that aligns with their interests.

A defensible valuation is more than just a calculation. Parties in disputes may recognise the need for legal representation early but hesitate when it comes to specialist valuation expertise. Some assume that a regular accountant or auditor can “do the math.” Others believe they can save costs by producing calculations internally. The reality is that valuation is a niche, highly technical discipline. When the stakes are high, the decision to engage a valuer can be pivotal in determining the outcome.

In this article we explore some of the cost-benefit considerations and share some tips to finding the right expert for you. 

The Different Lens of a Valuation Expert

In legal disputes, business valuation isn’t just a number-crunching exercise – it’s part of the evidence. The figures that emerge from such a valuation will be tested, challenged, and weighed alongside other testimony and evidence. It must not only be technically sound, but also withstand cross-examination, opposing expert critiques, and judicial scrutiny.

The Court will expect a valuer to explain not just what the value is, but why it’s reasonable in the circumstances. Every figure, assumption, and methodology has to be credible. This often means anticipating arguments that could be raised and preparing robust responses.

Aside from technical proficiency, a courtroom setting calls for forensic rigour, independence, and the ability to communicate complex concepts in a clear, persuasive manner.

Do You Need a Valuer?

Not every dispute requires a formal expert valuation. But the following scenarios are strong indicators that you should engage one:

The dispute involves the value of a business, or shares in a private company

Common situations include:

• Shareholder disputes
• Minority oppression claims
• Share buy-outs
• Divorce proceedings where at least one party owns a business
• Partnership dissolutions

If the outcome of a dispute hinges on the value of a stake in a business or private company, an independent valuation is essential and lends credibility to your position.

The opposing party has already appointed an expert

If the opposing side has engaged a valuation professional, you need an equally qualified professional to provide an independent, alternate view, or to review and critique the report of the opposing party’s expert.

In some situations, the experts acting for both parties may be required to meet and produce a joint statement, identifying areas of agreement and disagreement.

The value will be contested

Valuation methodologies that are commonly applied include:

• Income Approach (Discounted Cash Flow)
  • Projecting future cash flows and discounting to present value at an appropriate risk-adjusted rate.
• Market Approach
  • Benchmarking against valuation multiples of comparable companies.
• Net Asset Value Approach
  • Estimating equity value based on the net book value of assets and liabilities adjusted to their market values.

Even when the same valuation methodology is adopted, the results can be highly sensitive to assumptions — small changes in growth rates, discount rates, or market multiples can drastically alter the outcome. Bringing in a valuer ensures that your assumptions and value assessments are defensible and can withstand scrutiny.

There is suspected fraud, financial manipulation, or misconduct

Experts equipped with forensic or investigation skills are adept at unravelling intricate corporate structures, intercompany transactions, and decoding financial records and accounting entries, which may be critical in disputes where financial manipulation is suspected.

For example, in court-ordered buyouts relating to minority oppression claims, the controlling shareholder often retains access to the company’s financial records and may have an incentive to reduce the value of the business and the share price that would be paid for the minority shareholder’s stake. This can occur by suppressing revenue, overstating expenses, or diverting income to related entities. Such financial manipulation directly impacts valuation outcomes by understating earnings and can unfairly disadvantage the selling party.

In divorce proceedings where one or both spouses own a privately-held business, the owner-spouse often controls the financial information used to determine business value and support obligations. Some tactics that may be used include delaying or diverting contracts, shifting personal expenses into the business, or paying excessive compensation or bonuses to themselves.

While the tactics may vary in each case, such actions can materially distort the true worth of the business, affecting the share price or the pool of marital assets. Forensic analysis helps to ensure that the stakeholders receive a fair and accurate valuation of their interest.

Cost-Benefit Considerations

While there are upfront costs associated with hiring a specialized professional, the expense is often justified by the expert's ability to enhance the integrity of the valuation outcome. Here are some considerations:

Potential financial impact 

• If millions are at stake, the relative cost of expert valuation is small, but the potential benefit in influencing the court’s determination can be substantial.

Credibility 

• A professional report carries an inherent presumption of independent objectivity and neutrality that assists the judge in reaching a determination, whereas internal assessments are often dismissed as self-serving.
• Additionally, a poorly prepared valuation can be discredited in court, weakening your case. Correcting or countering such flaws later on can be costly.

Demands on time and resources

• A credible valuation requires comprehensive analysis of the business operations and financial results. Senior management must be prepared to dedicate resources for the retrieval of historical financial records, and participating in detailed interviews.

Well-informed negotiations

• A detailed valuation helps to clarify your position and assess potential exposure or entitlement. It gives you a factual basis for negotiation, allows for more confident early settlement discussions, and reduces the risk of being caught off guard by inflated or unsupported claims.

Support for cross-examination 

• Beyond their own testimony, valuation experts provide support by identifying technical flaws in the opposing expert’s report. This equips counsel with the specific technical questions needed to undermine the credibility of the opposition's evidence during cross-examination.

Deciding to bring in a valuation expert is about weighing the outlay in time and resources against the long-term benefits for your case. While it requires a commitment of resources, making this choice early allows you to move forward with a stronger hand.

Practical Tips for Engaging the Right Expert

Selecting the right professional requires a focus on specific competencies. Here are some tips when it comes to engaging an expert:

Check credentials and litigation experience

• Look for professionals accredited in valuation (e.g. CVA) and with litigation experience.

Assess independence

• Credibility is built on perceived objectivity. Your expert should be independent and impartial. An expert who appears to be a "hired gun" advocating for a predetermined outcome will be discredited.

Engage early

• Early involvement allows the expert to guide you in discovery requests and identify key documents and information.

Forensic / investigative skills

• Ability to look beyond the surface of financial statements to detect deeper issues such as manipulated earnings.

Clear communication skills

• In Court, the expert’s primary role is to assist the judge. Communication skills are important when explaining complicated financial concepts clearly to a judge.

Takeaways

In litigation, business valuation is not just about producing the “right” number — it’s about producing a defensible number that will withstand scrutiny. Whether you are a business owner embroiled in a dispute with your business partner or with your spouse, or a litigant seeking damages, engaging a qualified valuation professional can significantly strengthen your case.

The cost of doing so should be weighed against the stakes. But in high-value disputes, the benefits could far outweigh the expense.

If your case involves contested financials or deeper complexities involving potential financial manipulation or misconduct, take the proactive approach and engage a qualified specialist with the right skills and track record to support you and your legal counsel from the outset.

To get started on the next step, get in touch with our Litigation Support and Forensic specialists