Business partners may find it difficult to agree on a reasonable sale price should one shareholder wish to exit a company. Especially in the absence of a formal buy-sell agreement, an independent business appraisal is often needed to settle disputes on the 'fair value' of a company.
Hypothetical scenarios that require a business valuation
An employee who has received a significant portion of his compensation in the form of equity feels that he is being treated unfairly by the company's controlling shareholder. The employee feels that the controlling shareholder’s salary is excessive, which is one example of abuse to the minority shareholder. Without an existing buy-sell provision in place, a business valuation may be necessary in order for the employee to exit the company.
One of two business partners unexpectedly passed away. There were no provisions outlining protocol in the event of shareholder death and thus the shares owned by the deceased were passed along to the widow. The remaining founder does not wish for the widow to be a shareholder in the business and would like to purchase her shares, however, the two disagree on a fair price at which to exchange shares.
Special considerations for shareholder disputes:
Shareholder disputes can arise from many different circumstances. In general, they arise when a minority shareholder feels that their rights have been violated or they have been treated unfairly. In such cases, the minority shareholder may seek to have the business appraised prior to adverse decisions by the majority shareholder.
An important factor to remember is that the standard of value in stockholder disputes is ‘fair value’ rather than ‘fair market value’. The distinguishing factors are that the minority stockholder is often under duress and is essentially being forced to exit the business. Also, rather than a hypothetical buyer, the buyer is typically the majority shareholder.
In a shareholder dispute, both sides may hire their own business appraiser, or both sides may jointly hire a single appraiser. If the parties can agree to hire a single appraiser, it will likely reduce the amount of professional fees involved and allow both parties to find an equitable solution more quickly.
Documents required to complete an appraisal for shareholder disputes:
Profit and loss and balance sheet statements for the last three to five years
Interim profit and loss and balance sheet statements for the current year
Federal income tax returns for the last three to five years
Copies of any forecasts or projections
Operating Agreement or any other Shareholder Agreements
