Valuation of a business plays a critical role in adjudicating disputes among co-owners of closely-held businesses. There are numerous circumstances where a court may be required to determine the value of a litigant’s interest in a business, such as under a buy-sell agreement or appraisal rights statute, or as a buy-out remedy for shareholder oppression.
Valuing stock in closely held businesses “is one of the most perplexing problems facing the courts. Valuation techniques are complex. Furthermore, the courts may not be sufficiently familiar with accounting and financial theory to effectively resolve the intractable details in a manner satisfactory to all constituents.” The Stockton Anatomy of Valuing Stock in Closely Held Corporations: Pursuing the Phantom of Objectivity into the New Millennium, 2001 Colum. Bus. L. Rev. 161, 162.
Because so many assumptions are inherent in a valuation, it is “not an exact science, as witnessed by the frequency with which appraisers differ in their opinions concerning the appropriate value to assign . . . .” Hickory Creek Nursery, Inc. v. Johnston.
Basic Valuation Approaches
There are generally three approaches to valuation: (1) the income approach; (2) the asset approach; and (3) the market approach. Under what is called the “Delaware block approach,” an appraiser calculates value using all three approaches, assigns a weight to each approach, and the sum of each value multiplied by its assigned weight is the appraiser’s final opinion on value. The concept is to use all three approaches to triangulate on the most accurate valuation.
These three approaches will be discussed in more detail in subsequent posts.
(This is for informational purposes and is not legal advice.)