This article was originally published in the Canadian Arbitration and Mediation Journal of the ADR Institute of Canada.

Individuals and organizations form business relationships to solve problems and create value. At times, diverging views on how to achieve these objectives can result in disputes the parties are unable or unwilling to resolve without the involvement of a third party. The complexity of their dispute and the potential value at stake often determines whether disputants do nothing, attempt to resolve things directly by negotiation, or call upon an independent adjudicator, such as an arbitrator or court-appointed judge, to resolve the issues for them. One aspect – typically one of the most contentious aspects – of the dispute resolution process is quantifying the value or loss of a certain asset or event. Valuation is the act or process of estimating the value of an asset and an independent valuator is a person who provides an opinion of value. In this introductory article we discuss how independent valuators can help individuals, organizations, and adjudicators resolve business disputes.

How a valuator can help

Most parties involved in a business dispute want the same thing: a fair, transparent, timely, and cost effective resolution. If we begin with this end in mind, an independent professional who specializes in valuations can contribute to dispute resolution by

• Helping the parties identify their priorities so that they focus their time and effort on those aspects that “move the dial” rather than on contentious issues which have a limited impact on the financial outcome of the dispute.
• Asking the parties the right questions to identify potential information gaps; as the saying goes “you don’t know what you don’t know.”
• Explaining techncial concepts (read our article on Cap Rates and Multiples), methodologies, formulae, and calculations so that parties understand the “how” and the “why” that underlies “the number.”
• Providing market intelligence and insights otherwise unavailable to the parties.
• Bringing a sense of neutrality, credibility, and confidence to the dispute resolution process.

For example, a multi-generational business operating in the transportation industry (the “Company”) had two shareholders (the “Siblings”) actively working in the business while the remaining shareholders were out-of-town family members who had limited knowledge of the business (the “Cousins”). The Company’s performance had declined in recent years, the Cousins wanted to sell their respective ownership interests and the Siblings wanted to continue running the business. As a result, the Siblings offered to purchase the Cousins’ shares but this offer was perceived as a “lowball offer”. An independent Chartered Business Valuator (CBV) was retained by both parties after numerous attempts to negotiate a sale price had failed and the relationship had deteriorated. In the end, the CBVs report confirmed that many of the Siblings’ assumptions regarding the Company’s and its fair market value were not supported by reliable data and analyses.

What could go wrong?

An independent valuation can help disputing parties and/or adjudicators in the dispute resolution process by providing a range of realistic values for assets or ongoing enterprises.  However, in some circumstances valuations result in further confusion. How does this happen and why? First, the parties must accept that valuation is inherently subjective and, although there are best practices and professional standards aimed at improving consistency in valuations, it is possible (and likely) that two equally-qualified and competent valuators will arrive at different opinions of value even if they are provided the same factual information.

For example, a manufacturing business operating in Alberta’s energy sector was extremely profitable in the years leading up to 2014 when the price of oil was in excess of $100/bbl but when the price of oil declined drastically in late-2014 and 2015, so did the profitability of the business. Two competent valuators were provided the same historical operating and financial data on the business but their opinions of value were notably dissimilar – but why? It turned out the first Valuator agreed with industry professionals who anticipated market conditions in the energy sector would improve in the near future whereas the second Valuator shared the view of those professionals who believed the energy sector would remain depressed for many years.

In practice, disputing parties sometimes independently retain valuation expert(s) and, unless they agree on basic facts beforehand, there can be inconsistency with respect to the information provided to each valuator. Problems created by asymmetric information are compounded when one person or group has considerably more knowledge about the business than the others do. This can happen in situations where some investors are involved in the day-to-day operations of the business while others, known as passive investors, are not. Whether the parties intentionally withhold relevant information or selectively disclose information to advance their respective interests, the valuators’ reliance inaccurate information can lead to material errors in valuation.

For example, a dispute between the active and passive investors in a family-owned restaurant chain resulted in each party retaining their own valuator to estimate the value of the company. Each valuator was provided the company’s financial statements and tax returns but details with respect to the various non-arm’s length employment contracts and real property leases were not disclosed to either valuator. Although each valuator arrived at a relatively similar opinion of value, factual inconsistencies in their respective valuation reports indicated that legitimate operating expenses had been understated and as a result, the income and overall value of the company had been overstated by each valuator.

Helpful tips

Independence, impartiality, and objectivity are cornerstones of the valuation profession and disputing parties and decision makers can make use of these attributes to inform their decisions in a business dispute.

Members of the CBV Institute and the Appraisal Institute of Canada (AIC) are recognized experts in the valuation of business interests and real property, respectively. In a dispute resolution process where emotions are high and monetary values are significant, engaging a qualified valuator can bring much needed credibility and transparency to the process. An opinion of value from a qualified valuator signifies “the number” is backed by adherence to a code of ethics and professional reporting standard. As a result, disputants and decision makers benefit from knowing there are no conflicts of interest or independence concerns and that the appropriate scope of work, disclosures, calculations and explanations are included in the valuation report relied upon by the parties.

Parties involved in a dispute can benefit from jointly retaining a single valuation expert—as opposed to each retaining their own valuation expert—because doing so can reduce costs, accelerate timelines, and provide more robust reporting that enables confident decision making. In some circumstanaces, the valuator can convince the parties their win-lose approach to dispute resolution is having a negative impact on the overall value of their business and/or assets. Adopting a win-win approach can often result in improved financial outcomes and the betterment of ongoing relationships.

In the end, the willingness of disputing parties to resolve their disputes and the availability of relevant information are the key ingredients for valuation experts to help in the dispute resolution process.

Please contact us, in confidence, to discuss your matter and how we can assist in resolving your valuation-related dispute.