Valuation is one of the most contested issues litigated during the course of a minority oppression case. Because there is no public market for a closely held company, litigants spend a lot of time and energy arguing over what the interest is worth. That is because minority oppression litigation is typically resolved by verdict of settlement by one party buying another party out.
 

Valuation has been described by Courts “as an art, rather than a science.” The expert is charged with finding value in the business at its highest and best use. There are a few methods used by valuation experts in determining the “fair value,” of the subject company. They are:

  • the cost or asset
  • market
  • income approaches

An expert employing the cost or asset approach simply values and counts the assets owned by the corporation. It is often used to value companies which hold real estate. The asset or cost approach is often used to value a company whose assets, if sold, exceed its cash flow.

The market approach is a way of determining the value of a business by comparing it to actual transactions. It is difficult to employ the market approach in valuing a closely held company because there is generally a lack of market data to which to compare two closely held companies. Moreover, it requires certain subjective determinations because the appraiser needs to decide which companies it should be compared too when determining value. It is often used to value real estate.
 

For example, if I needed to value a residential property owned by a corporation, my client would retain a real estate broker who would compare “similar” sales in the community, so as to provide an opinion as to the value of the property.
 

The final approach used by business valuation experts is the “income approach.”  The income approach tries to determine the company’s value by considering the income the business has generated (or could generate). There are various methods within the income approach.  They are: the capitalization of income, discounted future income and the excess earnings method from Internal Revenue Ruling 68-609.

 

Scott Unger is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation. For questions, or additional information, please contact Mr. Unger.