Many lawyers have experience jointly retaining business valuation experts. There are significant potential benefits. Joint valuations can be faster, less expensive, flexible, and allow all parties in the dispute to be involved in the valuation process.
Many lawyers have also encountered issues that derailed a joint valuation process, causing delays, increasing costs, sometimes even preventing the valuation from being completed.
Establishing ground rules at the beginning of such a mandate and documenting key terms can significantly increase the likelihood of successfully resolving valuation issues and prevent the process from being disrupted. Changes may be required during the course of the engagement, but it should be by agreement between the parties, including the valuator.
Here are some important items to be determined and documented when jointly retaining a business valuator:
- How will the valuator be chosen? Often, one party submits a list of potential experts and the other selects an expert from this list. The party preparing this list, should consider whether there is an actual or perceived conflict with any of the experts being proposed.
- Will the report be binding on the parties? Or will it be used to assist the parties to negotiate a resolution.
- The level of assurance to be provided in the valuation report. There are three different types of reports based on the CICBV Professional Standards in order of increasing assurance (and increasing cost). They are: Calculation, Estimate and Comprehensive Valuation Reports. We typically recommend an Estimate Valuation Report which provides for more analysis than a Calculation Valuation Report, but is less costly than a Comprehensive Valuation Report.
- Exactly what is being valued? It can be the “en bloc” equity of a business, a particular class of equity shareholdings, a subset of a class of shares, the company’s net assets, or a subset of the net assets. There may be a dispute as to the percentage of a company that is owned by parties to the dispute. Practically, in most cases if there is a dispute regarding the ownership interest, a 100% interest of a business can be valued, and value can then be allocated to the parties at a later date once the ownership interest is clarified.
- The definition of value to be used. The most common value definition is “fair market value”. Fair market value is a well defined term. “Fair value” may be applicable if there is alleged oppression. Fair value is generally defined as fair market value without a minority or liquidity discount, although the definition may be further refined by the Court based on the circumstances. There can be differences in how fair market value is interpreted, such as whether synergies are reflected. For a minority interest, where a sale is not anticipated, synergies are typically not reflected in the valuation. However, if an “en bloc” sale to a third party is anticipated in an industry where purchasers pay for synergies, it may be possible to quantify and include synergies in the valuation. These issues need to be identified and clarified at the start of a joint valuation mandate because they are often material to the valuation.
- Establish the valuation date. Value can be significantly affected by the valuation date. If the valuation date cannot be agreed on, the valuation report can address the value at two or more potential valuation dates. This also allows parties to the dispute to identify the difference in the value depending on the date used.
- Will valuation provisions in shareholder or other agreements be applied? This may include valuation formulas or pre-determined earnings specified in shareholder or other agreements.
- Are minority or other discounts to be quantified and deducted? If these terms cannot be agreed on, calculations can be prepared with and without minority or other discounts.
- Document the valuation process. The valuation process including timelines should be documented, recognizing that the timelines may need to be altered. The valuation process can include:
- Preparing an initial information request.
- Speaking with both parties and their advisors separately to ensure that we are aware of all issues to be addressed.
- Reviewing all documents provided and identifying follow up document requests and/or requests for clarification.
- Issuing the draft report(s). This is typically issued without the conclusions to ensure that all parties agree on the underlying facts and assumptions.
- Meeting with the parties to obtain comments and respond to questions.
- Issuing the draft report with figures, and with any updates required based on comments received.
- Discussing the findings with both parties and responding to questions.
- Finalizing the report.
The above highlights major issues. Other considerations such as the use of outside experts, communication protocols, agreement on reliance on certain financial statements or information, should also be pre-agreed to.
While unanticipated issues often arise in the course of a mandate, if the parties can agree on important terms regarding the process at the beginning of the mandate, the likelihood and the impact of these unanticipated issues can be reduced. This increases the chance that a dispute will be resolved to the satisfaction of both parties in an efficient and cost-effective manner.