Thursday, September 13, 2012

Periodic Valuations Help Avoid Costly Legal Disputes

Relationships can break down over time.  Many of us have experienced this with a friend, spouse or business partner.  Shareholder disputes are among the most contentious and frequent types of business disputes.  In addition, over 40% of marriages will end in divorce before the 50th year of marriage. [1]
Conflicts between shareholders or spouses can become very emotional.  When shareholders decide to part ways, the value of the business becomes an extremely important issue.  A value is needed for purposes of a shareholder buyout.  In a marital separation, a value is needed for purposes of property division.  Assuming a third party sale of the business is not desired, the parties will need to agree on the value of the business.  Amicable negotiations with respect to business value can quickly turn into a lengthy and costly legal dispute.
Where the parties have not obtained any prior valuations prepared by an independent business valuator, or had prior discussions on value, diverging and potentially unrealistic expectations could emerge.  The purchasing shareholder will often expect a much lower value for the business than the selling shareholder.  In a marital separation the business owner spouse will generally expect a much lower value than the non-owner spouse.  Expectations can vary significantly which will exacerbate the legal dispute. 
Obtaining periodic valuations from an independent business valuator can be a very useful tool for avoiding a major dispute on value.  At the very least an annual conversation about the value of the business can help to avoid costly legal disputes in the event of a breakdown in the relationship (business or marital).
Obtaining periodic independent business valuations is akin to insurance.  Reviewing and discussing the independent valuation can help minimize the likelihood of diverging value expectations in the event of a future shareholder or marital dispute.  The cost of a periodic valuation is similar to the premiums paid on an insurance policy and should form part of the business owner’s overall wealth management budget.  It may hurt a little to incur the cost of an independent valuation when things are fine but it will hurt much more if a relationship breaks down and the parties enter into a lengthy and costly legal dispute over the value of the business.
Committing to obtaining a periodic business valuation allows the shareholders to discuss and agree to the current value of the business before any potential disagreements arise.  The valuation can also be helpful in the event of a marital dispute because the valuation issue will have already been dealt with.  The return on investment of an independent and annual valuation can be tremendous if it means avoiding a costly, time-consuming and perhaps devastating shareholder or marital dispute down the road.
[1] Source:, CANSIM Table 101-6511.

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