Avoiding Litigation When Shareholders Leave

Type of Matter:

A non-control owner/employee of a closely-held business was terminated as an employee and the other owners wanted to terminate the shareholder relationship, too. This was a matter that was wrapped in bad feelings and clearly heading for litigation to resolve the issue of how much the “out” partner was to be compensated for his/her shares.

Background:

A shareholder dispute in a closely-held company is often referred to as a corporate divorce. The only real difference to the emotional difficulties of divorce cases in family court is that there are no children involved. Although, for some business owners the business might as well be called another child for all the similarities in sensitivities exposed in a dispute over the ownership and value of their “baby.”

Arxis Financial was retained by the remaining owners to place a value on the business primarily for the purpose of settling the case. Our clear instructions were to be fair to all sides, objective, and to prepare a compelling case supporting our opinion – whatever it was. It was our clients’ intent to share our report with opposing counsel in the hopes that the report and its conclusion would be persuasive enough to serve as the basis for agreement before formal litigation commenced. Unfortunately, there was no written shareholder agreement and there were several versions of what the oral agreements might have been.

Arxis Work:

The financial history of the business was irregular and profitability was volatile. Consequently, historical results could not be relied upon to value the business so we asked for projections. There was no agreement among any of the partners as to what the economic future of the business would be. As a result, Arxis Financial looked pretty deeply at market transaction databases to identify similar private companies that had sold. While some were found that could serve as a means to value the company, we were dissatisfied with the persuasive nature of that evidence.

Arxis Financial had also asked for details about the buy-in transactions for current owners, as well as shareholder buy-out transactions over the history of the company. When analysis was done comparing the values in those transactions to current underlying operational metrics (sales, net income, EBITDA) a very compelling relationship was established that coincided with the multiples we found in market transactions that were obtained from independent transaction databases. Now we had a compelling story to tell.

Result:

The valuation report was prepared, issued, and distributed. As a result, the valuation issues were negotiated and resolved before lawsuits were filed.