Business valuation skills are essential, but not sufficient, to fairly resolve many disputes where money is at stake.
Often, business valuation skills are essential, because a proper determination of the financial outcome is:
- directly based on a valuation – e.g. in a shareholder oppression proceeding, where a shareholder may be ordered to purchase the shares of another shareholder for fair value;
- calculated by reference to a valuation – e.g. following a business purchase for over-value induced by misrepresentation, where damages may be equal to the difference between the actual price paid and the true value of the business; or
- calculated using valuation concepts and techniques adapted to the context – e.g. using discounted cash flow techniques to calculate the net present value of lost profits caused by a breach of contract.
However, general business valuation skills alone are often not enough to reach the right answer, because the legal context of a dispute dictates the relevant quantification principles and can affect the way in which valuation techniques must be applied.
- the nature of the claim will often determine the appropriate ‘basis of value’, which may be market value, fair value, ‘true value’, or some other measure;
- whilst the use of hindsight is generally prohibited for ‘market value’ valuations, a degree of hindsight may be permissible in certain legal situations, e.g. when assessing ‘true value’;
- whilst the standalone market value of a minority shareholding in a private company will normally attract discounts for lack of control and lack of marketability, such discounts may be inapplicable in certain legal contexts, e.g. when assessing fair value in a shareholder oppression case; and
- various adjustments may be required to reach the final financial outcome, e.g. in relation to mitigation issues, fairness considerations, allowances for risk or contingencies, tax consequences, and interest on sums assessed as at a date prior to judgment.
Consequently, when seeking a valuation or quantification of economic loss in the context of a dispute, it is important for parties and their legal advisers to seek the advice of a practitioner with forensic accounting and valuation skills.