Neutral Business Valuation: Better Results, Lower Cost

by Steve Popell on November 9, 2009

There are numerous reasons why you might want to have your company valued, such as:DollarSymbol

  • Buying another company
  • Selling your company
  • Stock option plan
  • Stock purchase plan
  • ESOP
  • Repurchase of minority shares (friendly or adversarial)
  • Divorce
  • Partnership breakup
  • Buy-sell agreement
  • Posthumous circumstances

Neutral business valuation, even (perhaps especially) in an adversarial situation, will frequently be faster, cheaper and less emotionally draining than a process involving rival experts, and will offer a far better chance for a negotiated settlement.

Having one’s own business valuation expert can provide a certain measure of comfort, but this system is fraught with problems. For one thing, the valuation process itself is not an exact science. Therefore, there is a high likelihood of disagreement between objective experts. If either expert allows any measure of advocacy to enter the process, the chances for compromise become that much more remote – even out of court.

If a valuation question must be settled in court, the outcome may be influenced as much by the relative skills of the experts as witnesses as by the intrinsic value of their testimonies. Should the more skillful testifier also be somewhat more partial than his or her counterpart, the eventual judgment may be inequitable. Ironically, the feeling of added security that the parties seek when they hire their own experts may be an illusion. Or, worse, it may backfire completely on one party.

Then, there is the matter of money. Clearly, whatever the merits of having two experts, they are at least twice as expensive as one. Moreover, the presence of two experts frequently increases the time that opposing attorneys must invest in attempting to negotiate a compromise or, failing that, litigating the issue.

Any business valuation involves a certain amount of subjectivity – a principal reason for the frequent disparity in expert opinions. As a result, the more subjective the valuation task (the small professional firm, for example) the more appropriate and helpful a neutral process is likely to be. This is especially true if one party has considerably less familiarity with the company and is, therefore, justifiably insecure. If the opinions of rival experts are far apart, how it will be very easy for the positions of the parties, however misinformed, to harden to the advantage of no one.

In order for neutral business valuation to work, there must be at least a modicum of good will between the parties. This does not mean that they have to be great friends, but it does mean that there is a minimum of open hostility and mistrust. There must be a genuine desire on the part of both parties to “work it out” rather than “fight it out.”

In a neutral valuation framework, the objective of all concerned should be fairness and equity, rather than simply “winning.” It would be foolish to expect that either side will (or should) neglect to look out for Number One, with the assistance of respective counsel or informal advisors. Nevertheless, the two sides must be willing to give compromise a genuine chance to succeed, rather than simply relying on grasping and confrontation to protect self-interest.

Beyond a high degree of professional competence, the neutral business valuation expert must have considerable “people” skills. Such an individual must be able to foster trust and confidence from all parties in the very first meeting. S/he must demonstrate sensitivity to the concerns of both parties, and should provide clear leadership in the search for an equitable result.

In this regard, a range of value, rather than a specific dollar amount, can be very helpful. First of all, it is far easier for the parties to agree on a range. Second, once this preliminary agreement has been reached, the subsequent negotiation has a “container” that should go a long way in preventing one side or the other from torpedoing the process by making unreasonable demands. While the expert should stand ready to mediate the final negotiation, respective counsel or others can also perform this function.

In addition, a preliminary report from the expert that is open to criticism will help to alleviate concerns that some factor may have been over-emphasized or under-emphasized, or that something important may have been overlooked completely. If a convincing case can be made that it is appropriate for the expert to revisit one or more issues, s/he should do so cheerfully. Following any changes in the opinion, the final report is delivered. The objective of the expert must be to assist the parties to reach an amicable solution. In this context, pride of authorship must take a back seat to the interests of the parties.

There is one other advantage to a neutral business valuation; namely, the impact on the relationship between the parties after the conclusion of the process. Even if there were some serious differences early on – perhaps causing the need for the valuation in the first place – such does not have to be the legacy for the parties. Quite the contrary, if they are able to overcome such emotions to reach a fair and equitable conclusion, their personal relationship may survive and, even, grow.

It’s worth a shot.

PhotoPopellThis article has been contributed by Steven D. Popell CMC (Certified Management Consultant.) Steve has been qualified as a business valuation expert since 1974, and has published extensively on this topic. CMC, a certification mark awarded by the Institute of Management Consultants USA, represents evidence of the highest standards of consulting and adherence to the ethical canons of the profession. Steve was a 2007 winner Collaborative Practice California Eureka Award for contributions to Collaborative Practice in this state.

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