Business Valuation Blog | Understanding Buying / Selling a Company

How a Business Valuation Helps When You're Facing Litigation

Posted by Business Valuation Specialists LLC on Nov 2, 2016 10:30:00 AM


There's nothing quite as nerve wracking as receiving an envelope from a law enforcement officer, court or attorney's office. What is it all about? How can you protect yourself? When you run a business, it can be even worse. Nobody likes having to deal with a lawsuit, whether it's because of a divorce, injury or other litigation. You don't want all the hard work you've put into building your business to go away, but how do you protect your business assets against a serious lawsuit that is demanding more than your business is worth as a settlement or judgment? One way to approach the problem is by proving your business' value through a company valuation. Here are some more details to consider.

What happens in litigation?

During a lawsuit, there is a period of discovery when attorneys from both sides may request documentation. This phase, referred to as discovery, is the point where you need to provide information on your company's financial history, personnel, industry and similar concerns. It is often during this part of the case that a company valuation may be requested or ordered by either side or the judge hearing the case. There may also be legal requirements to use a particular method of valuation for a particular type of lawsuit, or the judge may require a specific type of method be used to determine a company's value for the purpose of the lawsuit.

What information can the other side request?

The other side can request financial information, such as a balance sheet, income statements and cash flow statements. They may also get into business income tax returns, capital accounts, inventory records, aged accounts, accounts payable and receivable, employment and customer agreements, loan documents, employee benefit plans, lease information, asset lists and depreciation schedules. But these documents only reflect a business' financial state, not necessarily its value. A company may also have other mitigating factors such as large one-time costs or income from specific sales, research, development, insurance and similar concerns. Other areas that can affect a company's value include experience and skill of key business personnel, intangible assets such as intellectual property, the nature of the industry and the current market conditions.

How do I prove the valuation of a company in court?

The best way to prove your company's actual value is by having a proper business appraisal performed by a certified business valuation specialist. Because these specialists have been trained in recognized methods and approaches to business valuation, their appraisal reports have legal weight and can hold up in court. In some specific instances, you may want to retain a business valuation specialist who has experience as an expert witness, because they will be able to appear in court to justify a business valuation, especially if it is significantly different than what the other party is seeking in damages and penalties.

Though dealing with a lawsuit is stressful, you can protect your company through business valuations that prevent judgments that are higher than your company's value. If you need help with business appraisals for a litigation, you need to contact a certified business valuation specialist who has experience in legal cases.

Topics: litigation, how a business valuation helps