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Business Valuations

Posted on 24th January 2020 by Chris Makin

Your client is getting divorced, and the family business forms a significant part of the matrimonial estate.  Or your client is a director of a company and has been excluded from management decisions, probably coupled with a claim for constructive dismissal.  Or your client (or you?) has for many years been a partner in a professional firm, is coming up to retirement, and suspects that the continuing partners are not prepared to pay his entitlement.  What do you do?

In all such cases, and others, the value of the business, and your client’s part of it, must be determined.  I have acted frequently as a mediator and as an expert determiner in such matters, but today we are concerned with my work as expert valuer.

There are two essential requirements for your choice of valuer: a person who has experience and a deep understanding of business, and a person who has in effect a second profession as expert; for there is no point in choosing someone who knows about business, but who doesn’t know CPR or FPR, who can’t write an expert report in acceptable format, and who can’t survive cross-examination at trial.

On the first requirement, I have been managing partner in a series of firms, starting as a sole practitioner and eventually becoming head of litigation in a national firm.  When in general practice I acted for a huge range of clients, from market traders to PLCs.  And my chapter on Loss of Profits for the Self-employed, which appeared in Kemp & Kemp is available on request.  So I do understand business.

On the second requirement, I was one of the first to be accredited as a forensic accountant and expert witness by the ICAEW, and I am fellow at The Academy of Experts, one of only 60 world-wide.  And with over 100 court appearances, the witness box is a very familiar place!

So, credentials stated, let’s get down to business.

Whenever a client asks “What’s my business worth?” the reply should be “To whom, and for what purpose?”  To take an extreme example, in one of my family cases I was expert adviser to the wife’s legal team led by the then Nicholas Mostyn QC.  The husband had an IT company in London which had but one product, a program for international currency dealing.  It was in a desperate state: losing £1million a year, rent arrears of £½million, and the Revenue had a walking possession order for PAYE arrears of £¼million; yet the husband was in negotiation with a US company which had a whole suite of software for international banking but for this particular program.  They needed it to complete their suite, and the husband negotiated a multi-million $ sale of the company and a very well paid position for himself.  My task was to advise the lady’s lawyers on the parameters of the husband’s negotiations without spoiling her position – she was a 50% shareholder – and the tax consequences.  The outcome was highly satisfactory for all concerned.  One would have expected the value of the company to be £nil, but this was the ultimate special purchaser.

Back to more mundane matters, in family cases the normal instructions are for the expert to value each spouse’s shareholding, to estimate the tax which would be payable on disposal of the shares, and to say how much cash may be extracted from the company to aid a settlement.  Traditionally there would be separate experts on each side, and I remember many happy experiences with Hildebrand documents and the like!  These days, with Marco Pierre White having overturned Hildebrand and with judges’ preference for the SJE (so that they don’t have to strike a balance between opposing experts’ opinions of £15million as against £nil!) family valuations are less exciting, but no less worthwhile.  And there are always the big cases where party experts are needed.

In the commercial field, it is surprising how often one of the founders of a company is elbowed out by others, and has to mount a claim under Section 994 of the Companies Act for unfair prejudice.  I remember being expert in a 50:50 shareholder dispute where the company had a highly specialised process for treating timber.  The case went to trial and was part-heard three times.  By the fourth hearing, by which time costs had greatly exceeded the amount at stake, the judge spoke “…over the heads of all these expensive lawyers to you two sensible businessmen who used to be friends…” strongly urging them to negotiate and not prolong the agony.  They wouldn’t.  When it was over, I said to my opposing expert, an old friend “I’ve been urging our side to go to mediation, but they said your side refused” to which my friend replied “That’s funny, that’s what our side have been saying about your lot!”

In this blog I have said nothing about valuation techniques; about assets basis, dividend yield basis, earnings basis, P/Es, quasi partnerships per Ebrahimi –v- Westbourne Galleries and so on.  There isn’t space, and I wouldn’t want my readers to go glassy-eyed.  I have just written a helpsheet on business valuations for the ICAEW Forensic Group, and the basic checklist of information needed runs to five pages!  Can we just take it that after many, many such assignments I do understand how to do a valuation, and that we can share some of these matters if time allows and if you are really interested?

In the meantime, please bear in mind that for your expert assignment, valuation or other, my terms include an initial review of any case, with no charge if the matter does not proceed.  So it costs you nothing to find out if I can help you unravel some of these mysteries.

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Chris Makin

By Chris Makin

Chris is a chartered accountant with over 30 years experience as a forensic accountant and expert witness, and 20 years as a mediator and expert determiner.

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