Articles Posted in Valuation

  • Understanding the valuation of the business is critical to the owners of closely held business in planning and management.

  • Closely held business owners typically have most of their personal wealth tied up in their company, but rarely know the current value of the enterprise. 

  • Current valuation data is important for strategic planning, dispute avoidance, insurance purchases and tax compliance.


Business Valuation for Closely Held Business Owners

Understanding the value of your business is critical to the management and operation of a business, to protecting the value of the business, and to planning for the future. Many owners see valuation as an issue that you need to look at at certain stages in the life of the business—wwhen someone dies or gets divorced, when it’s sold, or when there’s a tax issue.

That value, however, doesn’t consider other, crucial reasons why valuation is necessary for the business owner. The reasons are both defensive and offensive. For example, you cannot know how much insurance you need for your business if you’re just guessing about what it’s worth. You need this information for the defensive purpose of protecting your investment.


Tools that You can Use

How much is your business worth today? 
You can get an immediate estimate of a range of values here.

We counsel clients on the valuation issues in their business.  Contact me with with questions.


Offensively, business valuation is a strategic tool that offers insight, guides decisions, and uncovers opportunities for growth.

Business owners, on average, have about 80 percent of their personal assets tied up in their businesses. But only 30 percent of the owners of closely held businesses have a clear picture of what the business is worth. Continue reading

  • Enterprise goodwill is the expectation that a business has in the continued patronage by its customers, regardless of the individuals involved. Personal goodwill is the expectation of continued patronage because of an individual’s continued participation in the business.

  • Personal goodwill is not an asset owned by a business, but it may be acquired through contractual arrangements including employment contracts and agreements not to compete with the business after employment.

  • As post-employment restrictive covenants become more difficult to enforce, the equity value of small, service-oriented businesses will be lowered.

  • Whether the closely held business is the owner of the goodwill that produces its revenue is a critical issue when valuing the entity.



Lawyers who are prohibited by the rules of professional ethics from any restriction on competition.  A real estate management company where the principals each work their own book of business.  A design-build firm in which a single principle generates the vast majority of the business.  An outside sales organization in which the owners divide profits based on origination.

All of these examples raise the thorny issue of who owns the goodwill that is responsible for the future earnings capacity of the business.  Does the reputation of the business belong to the business, or to the individuals?  As one commentator put, does the goodwill of the business go home for dinner every night?


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The issue of who owns the goodwill — the enterprise or the individuals— is likely to become even more important as the general sentiment is turning away from enforcing agreement not to compete and various states and federal agencies are taking steps restrict the imposition of agreements that restrict competition after employment. Continue reading

  • A New Jersey Court conducing the valuation of a business may use any technique or method generally acceptable in the financial community.

  • The application of a minority discount is a question of law, but likely will be based on the factual determinations of the court about the culpability of the litigants.

  • Business divorces cases are commonly heard in the Chancery Division, a court of equity in which principles of fairness and justice may be applied in addition to any statutory cause of action.

  • New Jersey’s statutory cause of action for oppression of a minority shareholder does not prevent the court from providing equitable remedies available outside the statute as a matter of common law.


New Jersey Business Valuation ATORNEYIn Sipko v. Kroger, the New Jersey Supreme Court declined to apply a minority discount in valuing the interest of a minority shareholder.

There was no real surprise there.  New Jersey courts are reluctant to apply a minority discount in the valuation of closely held businesses, which reduces the value of the minority interest.  Those discounts, which can signicantly lower the value of an interest — often by a third, or more — tend to reward wrongdoers. Continue reading

  • The controlling shareholders of a corporation owe fiduciary duties to the minority shareholders by virtue of their ability to control the affairs of the company.

  • Even when a merger complies with statutory requirements, where it benefits the controlling shareholders and does not have an apparent business purpose, it must also satisfy equitable principles of fairness.

  • The fiduciary duties owed by controlling shareholders is a basis to grant injunctive relief, even it is appears that money damages might make the minority shareholders whole for any misconduct.

Corporations Attorney

Berkowitz v. Power/Mate Corp., 135 N.J. Super. 36 (Chancery Division 1975)

Statute: NJSA 14:14-1(1)(a)

Synopsis: In class action seeking injunctive relief blocking merger of defendant Power/Mate with corporation controlled by the majority shareholders, on application for a preliminary injunction, the court enjoined a going-private merger by the defendant controlling shareholders to compel the sale by the minority shareholders to a corporation they controlled. Held that despite compliance with statutory requirements, the merger would be preliminarily enjoined.  See opinion Berkowitz v. Power/Mate Corporation. Continue reading

  • Buy-sell agreements, like a shotgun sale triggered by a deadlock, are the principal means by which the owners of closely held businesses protect against the worst consequences of deadlock.

  • Commonly used shotgun provisions allow one party to set the price and allow the other party to decided whether to buy or sell at the offered price.  Closely related to the shotgun is an auction that allows offerors a chance to sweeten their offers to buy.

  • The compelled sale of an equity interest triggered by a buy-sell agreement will be subject to the fiduciary duty of loyalty and the implied covenant of good faith and fair dealing.

  • Courts may apply shotgun or auction techniques when compelling the sale of a business as a going concern.


A well-drafted agreement between the owners of a business will address the issue of what to do in the event they become deadlocked.  This is true of effective shareholder agreements or corporate by-laws, limited liability company operating agreements or partnership agreements.

Agreements that are intended to prevent or resolve a deadlock in most circumstances will contain language that in some circumstances will require the exit of one person from the business.  This exit, in turn, requires payment of the value of the equity interest of the departing owner.

Canva-Photo-of-Silver-and-Brown-Flintlock-Pistol-With-Brass-Ammo-1024x683

In this post, the last in a series on deadlock in the closely held business, we look at buy-sell agreements as a means of breaking deadlocks without litigation and, in particular, a form of buy-sell often referred to as a shotgun.  A buy-sell often avoids or greatly simplifies litigation between the deadlock owners of a business, sure.  It also has the effect of avoiding deadlock in the first instance.


A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships


Shotgun provisions are a form of weapons control, like the mutually assured destruction that has – thankfully so far, at least – kept the world powers from global conflagration.  Owners of a closely held business have an emotional as well as a financial investment in a business and triggering a process in which they may be forced to sell will be seen as a very unwelcome choice.  In many cases, shotgun language in governing documents triggers compromise among the owners of a closely held business.

Buy-Sell Agreements Triggered by Deadlock

Continue reading

  • A limited liability company operating agreement may be amended informally by oral agreement or by a course of conduct.

  • The party that claims amendment of an operating agreement by a course of conduct must establish the clear and mutual intent of the parties to agree to the amendment.

  • A clear and unambiguous provision in an operating agreement that governs how the limited liability company will be valued in the future is an enforceable contract.


attorney for medical practice valuationA retiring member of a limited liability company was unable to convince a trial judge that the parties had amended the operating agreement through their course of conduct to adopt a new valuation approach.

Certificate of Agreed Value Required by Operating Agreement is not Updated for 17 Years

The opinion in the Chancery Division dismissed on summary judgment the plaintiff’s claim that sought to order the majority owners of a medical practice organized as an LLC to use a fair market value determination of the value of the interest of a retiring member, rather than to rely on an outdated “Certificate of Agreed Value” prepared in March 2001.

Continue reading

  • Business Divorce’ refers to disputes in which the owners of a closely held business, whether a corporation, limited liability company, partnership or limited partnership, must separate their business interests.

  • In many cases, such as oppressed minority shareholder cases or oppressed LLC member cases, there are allegations that those in control of the company have engaged in wrongful behavior.  In other cases, the deadlock of the owners on an important issue is the source of the dispute.

  • Courts that hear business divorce cases have the ability to intervene and impose short-term relief, such as an injunction or appointment of a custodian, and a permanent remedy, including the sale of the business, the compelled purchase of an owner’s interest or even the dissolution and liquidation of the enterprise.


 

achievement-agreement-body-language-1179804-1024x600No one gets married expecting to get divorced.  And no one forms a business expecting that it will fall apart.  Just as people get divorced, many businesses come to the point at which a business divorce is the best alternative because the partners cannot, or will not, continue to work together.  When that happens, the parties need to restructure, and often separate, their business interests.

Business Divorce Defined

We use the term business divorce to describe a series of different types of lawsuits that involve the owners of a closely held business. The defining character of the business divorce is that co-owners of a business must separate their business interests.  There are typically two alternatives.  Either one or more of the owners exits the business as part of a sale, or the business itself will be sold.  While much of the business divorce litigation in the courts today is in the form of an action for involuntary dissolution of the business, it is the rare case in which the business actually dissolves by settling its debts and selling its assets.  There are far better alternatives.  In this article, we focus on the closely held corporation.  Some of the principles are similar with other types of businesses, which we address in other articles, but the application of the principles are often quite different.

The law varies from state to state and much of this discussion is general.  To the extent that we discuss specific state laws that apply to business divorce, we focus on New York, New Jersey and Delaware law. Continue reading

  • In valuing the shares of a minority shareholder, a trial court must consider any valuation technique that is generally acceptable in the financial communities.  Determining fair value is an art, not a science.

  • Directors that hold a majority interest in a closely held business have a duty to deal fairly with the minority and in a merger to make full and fair disclosures and offer a fair price in exchange for shares.

  • A minority shareholder that sits by or acquiesces to wrongful conduct by the majority waives the right to later pursue a claim based on that behavior.

  • Fee awards are available only to shareholders with a statutory right to dissent and in the discretion of the judge.


Casey v. Brennan, 344 N.J. Super. 83 (App. Div. 2001)

Minority Shareholder Valuation Attorney

Statutes: NJSA 14A:11-1, NJSA 14A11-3; NJSA 14A:6-14: NJSA 14A:11-6; NJSA 14A:11-10

Action challenging the valuation provided by controlling directors (also majority shareholders) in corporate reorganization as plan to reduce number of shareholders to 75 or less to qualify for subchapter S status. Directors approved plan of merger at $73 a share in reorganization plan requiring small shareholders to sell. Trial Judge set value at $90 a share. (Opinion here.)  The Supreme Court affirmed the Appellate Division.  (Opinion here.)

Facts: Community Bank adopted a plan of merger as part of a plan of reorganization that would reduce the number of shareholders by acquring holdings of persons with less than 15,000 sharesat a price of $73 per share. Statutory dissenters and non-statutory dissenters brought various actions consolidated for trial. Trial court holding that proxy statement was misleading and provided non-statutory dissenters with right to sue, and determined fair value $90 per share. Affirmed in part and remanded for reconsideration of valuation issues that were rejected by trial court. Continue reading

Oppressed Minority Shareholder Litigation AttorneyAn oppressed minority shareholder was awarded approximately $750,000 in attorneys fees and expert expenses — some eight times the amount of the buyout — even though the majority had good reason to fire him from his position as the corporation’s CEO.

Fee Award Under Oppressed Shareholder Statute to Selling Shareholder

This case is a 14-year-old litigation involving a dispute between the family members of a family-owned business, and the outsider executive who was brought in to take over the management of the corporation.  The relationship quickly deteriorated amid allegations of misappropriation and sexual harassment in the workplace.

Oppressed Shareholder Valuation in Sale of Plant Business
The general rule is that a court should not apply discounts for marketability or lack of control (the later known as the minority discount) unless there is some unfairness or wrongdoing among the parties. Still, in the world of oppressed minority shareholder litigation, there is always some allegation of wrongdoing, so the question of discounts, or not, is invariably part of the ruling in any court-ordered valuation.

A trial court in Union County recently applied a 25 percent discount in the purchase of a 50% share of a family business after a 35-day trial. The net result was that the defendant in the case took significantly less for the acquisition of his shares in a family owned business than might have been available if there was not a finding of wrongdoing. Parker v. Parker, Docket No. UNN-C-108-13 (Chancery December 22, 2016) The parties involved in a business divorce litigation need to be cognizant that the allegations of bad behavior may have a significant effect on the ultimate determination of value made by a court.

Discounts Reduce Value of Buyout in Family Business Dispute

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