How Is A Minnesota Closely Held Corporation Valued In A Shareholder Dispute?
Answer
If you own a stake in a small corporation, you need to know what that stake is worth should a dispute arise. Your stock may not have a market value, so how would you value the business if you wanted to sell your share?
It depends. There are two situations. The first is where the corporation already has a method for valuation set up in its shareholder agreement. The second is where no such method is specified.
If the corporation has specified a valuation method in its shareholder agreement, the situation is generally straightforward. The business is valued according to that method.
If it does not, each side in the dispute will typically hire a valuation expert. If the experts’ calculations differ significantly, the parties may not be able to agree. If they cannot, they can take the question to court for a final resolution.
The Two Main Methods Of Valuation
Business valuation experts use two different main types of calculations to come to a determination of a corporation’s value:
- “EBITDA” (Earnings Before Interest, Taxes, Depreciation and Amortization) calculation
- “Book value” calculation, which simply considers the value of the business’s assets minus its debts and liabilities
These two calculation methods can come up with different numbers, and one may be more appropriate than the other for a particular corporation.
In general, an EBITDA calculation might be more useful if the shareholders personally contribute to the success of the business. A book value analysis might work better in a corporation where the shareholders are a step away from business operations.
An attorney experienced in shareholder disputes can help you understand which of the two methods may apply to your particular dispute. Or, you might choose to have the valuation expert prepare two valuations – one using each method.
Meanwhile, the other party to the dispute will bring in their own expert and choose their favored valuation method.
Is Disputing A Corporation’s Value Worth The Cost?
If you’re a shareholder and there is a dispute happening that could involve a buyout, it’s in your interest to get a favorable valuation.
That said, there is no guarantee that the dueling experts will agree on a final valuation. If the two calculations differ by, say, 10%, a cost-benefit analysis needs to be performed to determine whether you should go to court. Taking a question of valuation to the courts costs money that could eat into your returns.
It’s important to work with an attorney who has handled business value and shareholder actions before. He or she should be able to help you with that cost-benefit analysis and take the case to trial, if necessary.
It’s A Good Idea To Choose A Valuation Method Before A Dispute Arises
If a dispute hasn’t yet arisen, I’d like to urge you to add a valuation method to your shareholder agreement now. Maybe the corporation’s founders didn’t hire an attorney when they set up the corporation initially. Maybe they didn’t execute the shareholder agreement properly. Whatever the reason for the lack of a valuation method, it’s a good idea to address the issue as soon as possible.
A little extra effort now could make future disputes much less expensive to resolve.
The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.
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