by Let’s talk valuation. But before we do, imagine this scenario: A couple gets married and together starts a private business. Both are invested and the business blossoms. But a decade later insurmountable disputes cause the couple to file for divorce. Both tighten their grip on their joint venture, the business becoming like a tug-of-war rope between them. The wife pulls one direction, demanding her share, convinced the company is worth hundreds of thousands. The husband pulls on his end, also wanting his share, but knowing the business isn’t worth nearly that much. Neither will listen to the other. How do they determine the value of their private company and then split the shares equally?
I had the privilege of interviewing Christine Baker, Managing Director with Meyers, Harrison & Pia, LLC. Ms. Baker is not only a Certified Public Accountant (CPA), but is Accredited in Business Valuation (ABV) and Certified in Financial Forensics (CFF). Her accreditation equips her to do the investigative legwork when it comes to valuing privately-held businesses, and help couples and shareholders put a number to their investment.
Jaimie Blackman: Christine, your website says that you “specialize in high net worth matrimonial and shareholder dispute matters.” In layman’s terms, can you explain what a matrimonial or shareholder dispute means and why folks would need to hire someone like you?
Christine Baker: Over the years, my practice has found its way into a specific niche: we help individuals going through a divorce or individuals going through a business divorce (also known as a shareholders dispute).
Generally I or my team are hired when the individuals involved own a privately-owned business and need financial help. Let’s say an individual owns shares in a company like Google or Microsoft—those shares are publicly traded and it is relatively easy to determine their value.
But when you own interest in a private business, there is no readily available stock price. Therefore, when it comes time to buy someone out—whether it’s interest in a marital estate, or an ownership interest and one of the shareholders is being bought out—the value is not readily discernible. Frequently the parties cannot agree on a valuation, so they hire a financial expert to assist them.
Jaimie Blackman: Is it a neutral financial expert? Who pays you?
Christine Baker: That’s a great question. Frequently we’re hired as a neutral in a matrimonial matter. If the parties don’t feel comfortable hiring a neutral financial expert, then we’ll be hired by counsel for the wife or counsel for the husband. And in a shareholder dispute, it can be either counsel for the company or counsel for the shareholder who is being bought out.
Jaimie Blackman: Then it becomes a contest, doesn’t it, between two valuation experts? Is it an adversarial discussion?
CB: Well, it can go a couple different ways. Sometimes it’s a terrific situation where we know and respect the expert on the other side. It is not uncommon for the parties and their counsel on both sides to say, “Why don’t you financial experts do some work, do some financial analysis and then get together and talk about your findings.” We’ve found that many times we can actually work together with the other expert and come to an agreement. Or at least agree on enough points that we can then come to a settlement. Other times though, the situation is contentious and working together is not possible.
JB: It sounds like a mistake if a couple doesn’t hire a valuation expert in cases where they are going through a divorce and hold a privately owned company.
CB: It’s not necessarily a mistake, but it seems to me that it would be difficult to enter a settlement without really knowing the value of the business. Hiring an expert isn’t absolutely required every time, but frequently the business is the largest asset in the marital estate and knowing its value is important.
JB: Does this go before a judge or is it settled outside of a courtroom?
CB: My experience has been that most cases settle long before they get in front of a judge. But in instances where they can’t settle, and it does have to go all the way to trial, then it does go before a judge. The judge would require a valuation expert to provide expert testimony which will then be considered the evidence the judge uses to make a decision.
JB: What if divorce is not a factor? Should someone hire a valuations expert for simple matters of business policy and planning?
CB: That’s a great question too. It depends on the circumstances of the business. In the past few years I’ve seen family-held businesses with more than one sibling involved, or more than one generation involved, and it is common for an annual valuation (or a more frequent valuation) to be done.
This is beneficial in a few ways. For instance, there might be a case where the family business is passed down for several generations, and then someone decides they no longer want to be involved in the business and want to do something else professionally. Having frequent valuations allows the family member’s interests to be easily bought out.
Furthermore, annual valuations help the family get together, have a meeting, and discuss what went well, and whether or not the value of their investment is increasing or declining. Valuation gives them concrete information to asses.
JB: Christine, you mentioned small businesses that are multi-generational. Could you talk more about how your service can help families come together and help the family ensure the success of their business.
CB: I’ve read several recent studies that show two current trends worldwide. One trend in many shows that after the founder passes away, his children’s children—so the third generation—tends to sell the business because it’s no longer their passion the way it was for the older generation.
Another trend shows that family businesses—because they operate by looking from generation-to-generation rather than trying to maximize profits quarter to quarter—are able to make decisions that are truly based on the long-term. They want to set aside more cash rather than taking on long-term debt, or they want to make sure they’re appropriately investing in new equipment or facilities. So they are really planning ahead and invested in other family members, in their employees, and the families of the employees that work for them. There are interesting dynamics in multi-generational family businesses.
JB: How do your services help these family businesses?
CB: The most frequent way that I help these families is by communicating the value growth, meaning the value that has been added to the business and the ownership interest of the owners over the course of the year.
I show them how the value of the business has changed over time, versus simply stating the value at one specific point in time. This is what brings family members together and they feel like together they’ve created this business, been able to make a living and also give back to their community. Valuation is a benchmark of how effective the family is at executing their long-term goals.
JB: Let’s say you have a small business, about $5 million dollars in annual revenue, what is the investment for valuation?
CB: Well that depends on the circumstances and what questions the company needs answered. I’ll explain. If a business owner comes to me and says, “I’d like to get a feel for a benchmark. We don’t need an exhaustive analysis and we’re not putting our business up for sale. There is no litigation going on; we just want to get an estimate.” That may be completed on the high side for about $10,000.
But I’ve also seen other circumstances where the ownership is more complex. Maybe there’s more than one owner or people are fighting about something. That can become very expensive. It can be tens of thousands of dollars
JB: In that case, valuation might be a good preventative measure. Valuing a business before you’re having squabbles and fights can make the process cheaper!
CB: That’s a good point too Jaimie. It’s very common for businesses with more than one owner to have an operating/shareholder agreement. It is also very common to have a provision in the agreement that a valuation should be done periodically, so that if someone wants to retire or something tragic happens and they need to be bought out, the framework to do so will already be in place.
Though there are good intentions to put that provision in place, frequently those numbers aren’t updated or the agreement doesn’t get revisited until something tragic happens. A valuation should be considered annually. Even if the company doesn’t re-do a valuation annually, it should be considered, if only as a way to take care of one another.
JB: Sounds like valuation should be part of the normal operating procedures of the business. Yet it seems that more often than not, valuation comes into play when there’s a crisis and someone’s hand is forced and you come in to put out a fire.
CB: Yes, valuation isn’t always part of the business process most likely because the process can be expensive, or families just don’t know that valuation is available to them, so they don’t do it.
Even if people are aware of valuation, when there’s an option, they will defer. It is human nature. For example, when individuals or families are in the planning process, there are a few steps in the process that are optional, so naturally people just don’t do them.
JB: Succession planning is a huge, huge topic. And the private business owner is just as tortured with that. Maybe they have a son that cannot step-up, so they will defer that decision indefinitely. Bringing in an outside party like you can give a detached, honest opinion. Do you go deeper than the valuation? Do you advise the client also?
CB: Generally when talking to client, we start to get a feel for what it is that’s keeping them up at night. What I’ve done in the past is work with a team of professionals and people who can get a pulse for the interpersonal, intangible stuff that’s going on in the day-to-day life of the business. If something falls apart with the people during a transition like succession, that obviously impacts the company’s value.
My practice brings in a team of professionals that can help the business through major transitions, like the owner shifting the leadership role to another person. And these important transitions, when planned well, can take several years.
JB: Thank you Christine for your time and your insight.