In a Shareholder Dispute, How Can Competing Valuations Both Claim to Adhere to Professional Standards?

Concept

The simultaneous existence of two professionally sound yet divergent business valuations in a shareholder dispute represents an expected outcome of a system designed to model an uncertain future. The core of this issue resides in a misunderstanding of what professional standards govern. Standards such as the Uniform Standards of Professional Appraisal Practice (USPAP) or the International Valuation Standards (IVS) mandate a rigorous, transparent, and replicable process, they do not dictate a singular outcome.

A valuation is a disciplined framework for converting a narrative about a company’s future prospects into a quantitative estimate of present worth. This framework inherently contains variables that require expert judgment, and it is within the application of this judgment that divergence originates.

The integrity of a valuation rests on the defensibility of its underlying assumptions and the consistent application of its chosen methodology. Two experts can begin with the same set of raw financial data and, by selecting different but equally valid analytical pathways and assumptions, arrive at materially different conclusions. Both conclusions can fully adhere to professional standards, provided every choice is explicitly justified, documented, and grounded in accepted valuation theory.

The dispute, therefore, is rarely about a simple mathematical error. It is a conflict between two different, internally consistent, and professionally constructed visions of the company’s future economic reality.

A valuation’s adherence to professional standards is measured by the rigor of its methodology and the transparency of its assumptions, not by its proximity to a single, predetermined number.

Understanding this principle is the first step in deconstructing the conflict. The system of professional valuation is built to accommodate a range of potential outcomes, reflecting the inherent risk and uncertainty of any business enterprise. The key levers of this divergence are the specific standard of value applied, the primary valuation approach selected, and the critical economic assumptions that fuel the financial model.

Each of these components offers a range of professionally acceptable choices, and the combination of these choices creates the final valuation figure. The professional’s duty is to construct a logical and defensible path to their conclusion, a path that a judge, arbitrator, or another expert can follow, analyze, and critique.

What Are the Primary Sources of Valuation Disagreement?

The primary sources of disagreement in business valuation stem from foundational choices made at the outset of the engagement. These are not matters of simple arithmetic but of strategic interpretation, each of which can send the final valuation figure down a different path. Recognizing these key points of divergence is essential for any principal involved in a shareholder dispute.

• Standard of Value This is the fundamental definition of value being sought. The two most common standards, Fair Market Value and Fair Value, have distinct legal and financial definitions that can lead to significantly different outcomes, particularly concerning the application of discounts.
• Methodological Emphasis Valuation professionals have three primary approaches at their disposal ▴ the Income Approach, the Market Approach, and the Asset Approach. While an expert will often consider all three, the weight assigned to each can dramatically alter the conclusion. One expert may argue that future cash flow is the most reliable indicator of value, while another may contend that recent market transactions for similar companies provide a more realistic benchmark.
• Subjective Assumptions Financial models are driven by assumptions about the future. These include projections of revenue growth, operating margins, capital expenditures, and, most critically, the discount rate used to calculate the present value of future earnings. Each of these inputs is a product of expert judgment, informed by data but ultimately subjective.
• Application of Discounts For interests in privately held companies, discounts for lack of control (DLOC) and lack of marketability (DLOM) are often applied. The justification for and magnitude of these discounts are frequent and significant points of contention. A minority shareholder’s expert may argue for minimal discounts, while a majority shareholder’s expert will contend that the lack of control and illiquidity warrants substantial downward adjustments.

Each of these areas allows for a range of professionally defensible positions. The resulting valuation is the product of a series of these judgments, and it is the cumulative effect of these differences in judgment that results in two competing, yet professionally compliant, valuation reports.

Strategy

In a shareholder dispute, the valuation report is more than a number; it is a strategic instrument. Understanding how different, valid strategies can be deployed within the bounds of professional standards is key to navigating these conflicts. The divergence in valuations is not random, it is the result of deliberate choices made by the valuation experts, each designed to advocate for their client’s position while maintaining professional integrity. The core of the strategy lies in the selection and justification of the standard of value, the primary valuation methodologies, and the critical underlying assumptions.

The Critical Choice of Valuation Standard

The selection of the standard of value is arguably the most decisive strategic decision in a valuation for a shareholder dispute. It sets the entire framework for the analysis. The two dominant standards, Fair Market Value and Fair Value, appear similar but have profoundly different implications, especially regarding the application of discounts that can reduce the value of a minority stake.

Fair Market Value (FMV) is the price at which a property would change hands between a hypothetical willing buyer and a hypothetical willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. This standard explicitly considers the perspective of an outside investor, which makes discounts for lack of control and marketability highly relevant. An external buyer would pay less for a minority stake because they cannot direct the company’s policy and cannot easily sell the shares.

Fair Value, conversely, is a legal standard defined by state statutes, often applied in cases of shareholder oppression or dissenters’ rights. In many jurisdictions, courts have interpreted “fair value” to mean a pro-rata share of the entire company’s value, specifically precluding discounts for lack of control or marketability. The logic is that a minority shareholder being forced out should not be penalized for the very lack of control that the majority is exercising to their detriment. The choice between these standards can therefore create a massive valuation gap before any financial analysis even begins.

The standard of value is the lens through which the entire financial reality of the company is viewed and interpreted.

The following table illustrates the strategic implications of this choice:

Deconstructing the Methodological Arsenal

Once a standard of value is set, the expert chooses which valuation approach, or combination of approaches, will form the core of their analysis. While professionals often calculate the value using multiple methods, the one they emphasize strategically shapes the narrative. Each approach has its own strengths and weaknesses, and each is susceptible to different forms of subjective judgment.

1. The Income Approach This method, most commonly executed through a Discounted Cash Flow (DCF) analysis, values the business based on the present value of its expected future cash flows. It is inherently forward-looking and thus heavily reliant on assumptions. An expert seeking a higher valuation might project aggressive revenue growth and margin expansion, while justifying a lower discount rate (implying lower risk). Conversely, an expert aiming for a lower valuation can use more conservative growth projections and a higher discount rate to reflect perceived market or operational risks. Both sets of assumptions can be “reasonable” and defensible, yet lead to vastly different results.
2. The Market Approach This approach values the subject company by comparing it to similar companies that have been sold (the “precedent transaction method”) or to publicly traded companies (the “guideline public company method”). The strategic element here lies in the selection of the “comparable” companies and the valuation multiples (e.g. Price/Earnings, EV/EBITDA) derived from them. An expert can argue that a specific set of high-multiple comparable companies is the most relevant, while another expert can select a different set with lower multiples, arguing they are a better fit due to size, geography, or business model. There is no perfect comparable, making the selection process a key area of professional judgment and potential disagreement.
3. The Asset Approach This approach values a company based on the fair market value of its net assets. It is most often used for holding companies or businesses where the value is tied directly to tangible assets, or in situations contemplating liquidation. It typically provides a “floor” value for the business. In a dispute over a profitable operating company, relying heavily on the asset approach would be a conservative strategy, likely leading to a lower valuation than the income or market approaches. An expert might emphasize this approach if they believe the company’s future earnings potential is highly speculative or unsustainable.

How Do Subjective Inputs Drive Valuation Outcomes?

The engine of any valuation model is its set of assumptions. It is here that the “art” of valuation meets the “science.” Even with the most sophisticated models, the output is entirely dependent on the quality and nature of these inputs. In a dispute, these inputs become focal points of debate, with each expert defending their choices based on their analysis of the company and the broader economy.

Assumptions are the bridge between historical data and future expectations, and it is across this bridge that competing valuations travel.

The table below breaks down some of the most contentious assumptions and how they influence the final valuation:

Ultimately, a valuation expert’s strategy is to build a coherent and internally consistent narrative, supported by these choices. They select a standard of value, emphasize the methodology, and choose the assumptions that logically lead to a conclusion favorable to their client, all while staying within the documented and defensible bounds of their professional standards. The existence of a competing valuation simply means there is another, equally well-constructed narrative leading to a different conclusion.

Execution

The execution of a business valuation in a shareholder dispute is a disciplined, procedural affair. It moves from broad strategic choices to granular, quantitative analysis. For the principals involved, understanding this process is critical for scrutinizing the work of both their own and the opposing expert. The final valuation number is the culmination of a multi-stage operational process, and every step of that process is a potential point of leverage or vulnerability in a dispute.

The Operational Playbook for a Valuation Engagement

A valuation expert follows a structured path to ensure their final report is comprehensive, defensible, and compliant with professional standards. This process is designed to be systematic and auditable, allowing a third party to understand and replicate the expert’s logic.

1. Engagement and Scope Definition The process begins with a formal engagement letter that defines the scope of the work. This is a critical stage where the expert, in consultation with legal counsel, establishes the purpose of the valuation, the standard of value to be applied (e.g. Fair Market Value vs. Fair Value), and the “as of” date for the valuation. This initial framing dictates the rules for the rest of the analysis.
2. Information and Data Gathering The expert then requests and collects a vast amount of information. This includes historical financial statements (typically 3-5 years), internal budgets and forecasts, shareholder agreements, material contracts, and detailed information about the company’s operations, management, and competitive landscape. The quality and completeness of this data directly impact the reliability of the final valuation.
3. Analysis of the Subject Company The expert performs a deep analysis of the collected data. This involves calculating key financial ratios, analyzing trends in revenue and profitability, assessing the company’s strengths and weaknesses, and understanding its position within its industry. This phase connects the raw numbers to the company’s operational reality.
4. Application of Valuation Methodologies This is the core computational phase. The expert builds financial models for the Income, Market, and Asset approaches. This involves creating detailed DCF models, researching and selecting comparable companies and transactions, and assessing the value of the company’s tangible and intangible assets.
5. Synthesis and Reconciliation of Value An expert rarely relies on a single methodology. They will arrive at different valuation indications from the Income, Market, and Asset approaches. The expert then uses their professional judgment to reconcile these different values into a single, concluded opinion of value. They may assign weights to each approach based on which one they believe is most appropriate for the specific company and the purpose of the valuation. This weighting is a significant area of judgment.
6. Drafting and Finalizing the Valuation Report The final step is the creation of a detailed written report. Professional standards require this report to be comprehensive, explaining the scope of the work, the methodologies used, the assumptions made, and the reasoning behind the final conclusion. The report is structured to be a defensible document that can withstand scrutiny in negotiations, mediation, or a courtroom.

Quantitative Modeling the Anatomy of Divergence

To see how two experts can arrive at different conclusions, it is instructive to examine a simplified, side-by-side quantitative scenario. Consider a dispute over a minority interest in “Privatetech Inc. ” a profitable, privately-held software company.

• Valuator A is retained by the minority shareholder being bought out. Their goal is to secure the highest defensible value, arguing from a “Fair Value” standard.
• Valuator B is retained by the majority shareholders. Their goal is to support a lower, yet still defensible, purchase price, arguing from a “Fair Market Value” standard.

Both start with the same baseline data ▴ Last Year’s EBITDA of $5,000,000. Both use a DCF and a Market Approach and weigh them equally.

The Role of the Expert Witness in Court

When a shareholder dispute proceeds to litigation, the valuation reports become central pieces of evidence, and the valuators become expert witnesses. In this context, the execution of the valuation is placed under a microscope. The expert’s role is to educate the court on their process and persuade the judge or jury that their valuation is the more credible of the two.

An effective expert witness must be able to:

• Defend their methodology They must clearly explain why they chose a particular standard of value and why they weighted the valuation approaches as they did.
• Justify their assumptions They will be cross-examined on every critical input, from the growth rate to the discount rate to the size of the marketability discount. They must provide a sound, logical basis for each choice.
• Critique the opposing valuation A key part of their testimony will involve identifying the weaknesses or what they perceive as less-reasonable assumptions in the opposing expert’s report.
• Maintain credibility and objectivity The expert must present as an objective professional whose opinion is grounded in the facts and accepted valuation theory, not simply as a “hired gun” for their client.

Ultimately, the court will weigh the testimony of both experts. The judge may accept one valuation in its entirety, reject both and appoint a neutral third expert, or even pick and choose elements from both reports to arrive at its own conclusion of value. The strength of the execution ▴ the thoroughness of the data gathering, the clarity of the analysis, and the defensibility of the judgments ▴ determines which valuation is more likely to prevail.

Reflection

The examination of competing valuations reveals a fundamental truth about corporate ownership ▴ a shareholder agreement is the foundational architecture of a business relationship. The disputes that arise from divergent valuations are often symptoms of a structural weakness in this architecture. The process of valuation, with its reliance on judgment and interpretation, thrives in ambiguity. A well-constructed buy-sell agreement, drafted with foresight, removes this ambiguity.

Consider your own operational framework. Does it contain a pre-defined, agreed-upon mechanism for determining value? Is the standard of value explicitly named? Is the methodology for selecting a valuation expert clearly outlined?

Answering these questions in times of stability is the most effective way to manage the financial and emotional costs of a future dispute. The knowledge of how valuations can diverge is not just a tool for conflict; it is a blueprint for creating corporate governance systems that are resilient, transparent, and equitable for all principals involved.