In business, it’s not uncommon for relationships to become frayed. As a shareholder or owner of a company, you may have to contend with shareholders’ disputes at some point — and how prepared you are can have a huge impact on both the short and long-term future of your firm.
Shareholders’ disputes are increasingly common in today’s dynamic business environment. When things are going well, it’s all too easy for one party not totally pulling their weight to be overlooked. However, when challenges arise — whether from market pressures, strategic disagreements, or changing business models — these issues quickly come to the fore, and disputes are sure to follow.
One of the key tools in the arsenal of any company owner entangled in shareholders’ disputes should be business valuation. It can turn the tide of a dispute, efficiently and effectively putting an end to the issues.
The following blog will break down what business valuation means, explore common methods of valuation, examine types of shareholder disputes that can be resolved through company valuation, and discuss exactly how business valuation helps with shareholder dispute resolution.
What Does Business Valuation Mean?
Business valuation is the process of determining the market value of a business. While business valuation may differ from company to company, the final goal should always remain the same — to determine an approximate yet accurate value taking into account factors including expenses, assets, strategy, digital infrastructure, intellectual property, and more.
The purpose of a business valuation is typically to give either an owner or a potential investor an objective estimate and an idea of what the company they own or are seeking to own is worth.
Most Common Business Valuation Methods in the UK
The most common business valuation methods in the UK look at a company’s income, net assets, or dividend yield. There are other prevalent techniques, but these three are what you can likely expect, as they remain the most preferred in the United Kingdom amongst business owners, shareholders, and forensic accountants alike.
The three most common methods of business valuation are:
- Income Approach: Assessing a business’s value based on its income is done with the mindset that owners or prospective buyers will primarily be looking at the future return on investment it may achieve from a business. As a result, this amount should be seen as the main indicator of value. This increasingly includes consideration of digital revenue channels and recurring revenue streams.
- Net Asset Method: The Net Asset Method considers the value of the assets and liabilities of a business. This approach is useful in an asset-heavy business with limited trade. Modern valuations now also account for intangible assets including intellectual property, technology platforms, and brand value.
- Dividend Yield Basis: To calculate the dividend yield basis of your business, you must divide the maintainable dividend by the required rate of return. This method is particularly useful in cases of minority shareholders’ disputes.
For further information about the primary methods of business valuation, view our bespoke blog going into greater detail on the subject.
Types of Shareholder Disputes Where Business Valuation Can Help
From removing a partner or being removed from your business, unhappiness over the value of your dividend, accusations of withholding financial information, or a shareholder or partner seeking to exit the company, there are all manner of different types of shareholder disputes — and business valuation can help resolve them all.
Common types of shareholder disputes include:
Partner Removed From Business
Any shareholder agreement should include clear precedent of when and how a shareholder can be removed. However, this is not always the case, which leads to a common cause for dispute.
If attempts to remove a partner from the business have not led to an amicable conclusion for both parties, it is not unheard of for the ‘aggrieved’ party to attempt to demand a premium in return for their shares in order to hold the remaining partners or shareholders to ransom. This is often done to attempt to skew the balance of power in a situation in their favour.
Conducting a thorough and detailed business valuation using any of the common methods listed above or beyond should lead to a fair compromise being made and a price being agreed.
Unhappiness with Value of Dividend
It is common for shareholders to not technically even be employed or involved in the day-to-day running and management of the business they own shares in. In these situations, the only interaction the shareholder will actually have with the business is to collect the income by way of dividend on their investment. However, if their expectations for the amount they will receive do not match the reality of what they achieve, a dispute is sure to follow.
A business valuation can be utilised to come up with a more exact and data-driven dividend amount. This evidence with regards to the actual and fair value of the dividend should, in most cases, put an end to any unhappiness.
Accusations of Withholding Financial Information
When conducting business, it is unfortunate that honesty is not always guaranteed. One of the most serious breaches of trust in business can be accusations of a company director withholding financial information from a shareholder.
This practice can be done to benefit a director in multiple ways:
- To trick a shareholder into believing that their investment is performing well, when in fact the business is struggling — perhaps to allow for additional breathing room
- Misleading shareholders that the company is underperforming and struggling in order to get away with falsely limiting dividend payouts
- Withholding information about payments to suppliers, which could ultimately lead to the company being wound up
With increased transparency requirements under recent UK legislation including the Economic Crime and Corporate Transparency Act 2023, the risks associated with withholding financial information have become more severe. An independent business valuation can help uncover discrepancies and restore trust.
Shareholder or Partner Wanting to Exit the Firm
As covered above, a business opting to remove a shareholder can cause significant issues for all parties. However, if not handled properly, a shareholder or partner seeking to exit a business can also cause disagreement.
The primary cause for issue usually will boil down to the outgoing shareholder or partner seeking to get their perceived value of their shares, which can often be vastly different from reality. Due to the value of a business being in a constant state of flux — particularly in today’s rapidly evolving business landscape — this amount cannot be laid out in any shareholder agreement and is instead left to all parties to work out should and when they need to.
How Business Valuation Helps with Shareholder Dispute Resolution
In the event of shareholders’ disputes, particularly highly contentious disputes, it is likely that one party will either wish to exit, or for their investment to be met with significant compensation. In this case, the true value of your business will play a vital part in shareholder dispute resolution.
Finding a valuation figure that both parties will agree on can often be difficult — as both sides of the dispute will be seeking to skew the valuation in their favour.
Regardless of how shareholder dispute resolution is ultimately achieved, an up-to-date business valuation is likely necessary. In some cases, a shareholder agreement will include a right of appraisal in the event of just such a dispute.
When attempting to utilise a business valuation to assist in shareholder dispute resolution, it is always worth considering consulting with an independent expert such as a forensic accountant. An expert will be able to evaluate your company’s situation and remain unbiased when conducting the valuation. This verifiably fair assessment can go a huge way towards bringing to an end what has likely been a difficult period of unrest for the business, while accounting for modern business assets including digital platforms and intellectual property.
For more information about the process of valuing a business during shareholders’ disputes, check out our dedicated expert guide.
Why Work with Inquesta Forensic When Valuing a Business
Commercial disputes come in all shapes and sizes, and can be incredibly complicated and difficult to resolve. Inquesta Forensic has decades of experience in forensic accounting, making us perfectly placed to help, no matter the issue.
Our expert team will carry out an in-depth review of your company and provide an accurate valuation, taking into account a variety of different areas of your business — from traditional assets and revenue streams to digital infrastructure and intellectual property that characterise modern businesses. The vast pools of expertise and knowledge within our specialist team means that you can be sure that no matter what, you are in the best possible hands.
For additional information on conducting a business valuation for shareholders’ disputes, have a look at our eBook, or contact us today and find out more about how Inquesta Forensic can assist you or to book a free no obligation consultation.
