Uncertainty Disclosure in Disputed Business Valuations

Abstract

For every circumstance that leads to the need for a business valuation – e.g. M & A, a shareholder derivative action, estate planning, bankruptcy – there are at least as many reasons for the valuation to be disputed as there are entities who will be affected by a relatively high or relatively low value: buyer and seller negotiating a purchase price, minority and majority shareholder arguing over the value of an interest, business owner and the U.S. Treasury calculating a tax exposure, senior and junior creditors bargaining in a reorganization, etc. This paper presents a metric for incorporating valuator-generated measures of uncertainty in competing valuations, and a resolution protocol based on that metric which avoids some of the well-known problems associated with simple averaging or Final Offer Arbitration. Considering the dispersion of each valuator’s estimate and creating the threat of a third-party unbiased estimate increases the likelihood that an extreme estimate will be discarded or discounted. By focusing not only on the point estimate but also on its variability, the process creates incentives for settlement.