Family Business Valuation in a Dispute

Family business valuation in a dispute is rarely straightforward. Specifically, the question is not what the business would sell for in the open market. By contrast, it is what the shares of a particular family member should fetch in the very specific context of an unfair prejudice buyout, a divorce, a death, or a negotiated exit. Importantly, the answer depends as much on legal principles as on accounting figures. Crucially, the court has wide discretion in how to approach the valuation, and the outcome can vary by hundreds of thousands of pounds depending on the choices the court makes. As a result, family business owners contemplating a dispute or a transaction need to understand the basics of how share valuation actually works in this area.

This page explains how shares in a family business are valued when there is a dispute. Specifically, it covers the legal principles, the methods of valuation, the question of minority discounts, the impact of the quasi-partnership doctrine, and the practical realities of valuation evidence in court.

Why family business valuation is different

Importantly, the valuation of a family business in a dispute differs from any ordinary commercial valuation. Specifically, there are three key reasons.

First, there is no real market for minority shares in a family business. Specifically, no one outside the family will buy a minority stake. As a result, the price the shares would fetch in an actual sale is usually nothing or close to it. By contrast, the court has to value the shares as if there were a willing buyer and a willing seller, on terms set by the law rather than the market.

Second, the value of the business may have been affected by the very conduct that gave rise to the dispute. For example, the working family members may have suppressed dividends and paid themselves excessive salaries. As a result, the historic financial statements may understate the value that the company would have had without the unfair conduct. Crucially, the court has to decide whether and how to adjust for this.

Third, the family relationship and the structure of the company make ordinary valuation tools imperfect. Specifically, the company may be a quasi-partnership, in which case different rules apply. The shareholders may have legitimate expectations that affect the value. The history of how the parties treated each other matters in ways that it would not in an ordinary commercial valuation. For the wider legal framework, see quasi-partnership in family companies.

The principle of fair value

Crucially, the courts have developed a specific concept for valuing shares in family business disputes. Specifically, this is the concept of “fair value”. Importantly, fair value is not the same as market value. By contrast, market value assumes a sale between a hypothetical willing buyer and a hypothetical willing seller, neither of whom exists in the actual situation. As a result, market value can be misleading in the context of a family business dispute.

Fair value, by contrast, is the value the court considers fair between the actual parties in the actual circumstances. Specifically, it takes into account the conduct of the parties, the structure of the company, the history of the relationship, and the purpose of the valuation. As a result, fair value can be higher or lower than market value depending on the facts. Crucially, fair value is the standard the court applies in unfair prejudice buyouts under section 996 of the Companies Act 2006.

The court’s wide discretion

Importantly, the court’s discretion on valuation is one of the widest in English company law. Specifically, the leading authority is Re Bird Precision Bellows Ltd [1986] Ch 658. There, the Court of Appeal confirmed that the court has a very wide discretion to do what is fair and equitable in all the circumstances. As a result, the court can choose the date of valuation, the methodology, and the question whether to apply a minority discount, all on the basis of what it considers fair.

Crucially, in Re Solent Garage Services Ltd [2020] EWHC 1975 (Ch), the court adopted a deliberately broad-brush approach to valuation in a small case where the expert’s range was £25,000 to £35,000. Specifically, the judge eventually arrived at £45,500 by combining a dividend multiplier with a forward-looking value adjustment. Importantly, the case illustrates that the court is not bound to accept the expert evidence and can use its own judgment to reach a fair result. As a result, valuation in family business disputes is more art than science.

The methods of valuation

By contrast, the methods of valuation used by experts in family business disputes are reasonably standard. Specifically, the main methods are these.

Earnings or income-based valuation

First, the most common method is an earnings or income-based valuation. Specifically, the expert estimates the maintainable earnings of the business and applies a multiple to them. Importantly, the multiple varies by industry, the size of the business, the quality of the management, the predictability of earnings, and the prospects for growth. As a result, the same business can be valued at very different figures depending on the multiple chosen.

Crucially, the earnings need to be adjusted to reflect maintainable rather than historic figures. Specifically, this typically involves adding back excessive remuneration paid to working family members, removing any non-recurring items, and adjusting for related-party transactions. As a result, the adjustments often increase the figure significantly. Importantly, this is one of the reasons why the working family members’ remuneration becomes such a central issue in valuation disputes.

Net asset valuation

Second, where the business is asset-rich and the earnings are weak, the expert may use a net asset valuation. Specifically, this approach values the company at the net realisable value of its assets less its liabilities. Importantly, this method is common in property-owning family companies and in businesses where the earnings have been suppressed for years. By contrast, it can produce a figure significantly lower than the earnings-based approach for trading businesses.

Discounted cash flow

Third, in larger and more complex cases, the expert may use a discounted cash flow analysis. Specifically, this projects future cash flows and discounts them back to a present value. Importantly, the method is more theoretically defensible than the earnings multiple approach but requires assumptions about future performance that are inherently uncertain. As a result, it is less commonly used in smaller family business disputes.

Hybrid methods

Finally, the expert may use a combination of methods to test the result. Specifically, this is what the court did in Re Solent Garage Services Ltd, where the judge combined a dividend multiplier with a forward-looking adjustment. Importantly, the use of multiple methods provides a sense-check on the figure. As a result, the eventual valuation is often a balance between several approaches rather than a single calculation.

The minority discount question

Crucially, the single most important issue in many family business valuations is whether a minority discount applies. Specifically, a minority discount reflects the reality that a minority shareholding is worth proportionally less than its share of the overall company. As a result, applying a minority discount can reduce the value of a 25 per cent shareholding from £250,000 (proportional) to £100,000 or less (discounted).

Importantly, in a quasi-partnership case, the court usually values the shares without applying a minority discount. The leading authority is Re Bird Precision Bellows Ltd [1986] Ch 658. Specifically, the rationale is that the parties agreed at the outset to participate on equal terms, and the court will not allow the majority to use the corporate form to defeat that agreement. As a result, the minority shareholder receives the proportional value of the company.

By contrast, in a non-quasi-partnership case, a minority discount usually applies. Specifically, the leading authority is Strahan v Wilcock [2006] EWCA Civ 13, in which the Court of Appeal held that a minority discount is the default position in the absence of quasi-partnership status. As a result, the question whether a particular company is a quasi-partnership often determines whether a discount applies.

When even a quasi-partner can lose the no-discount protection

Importantly, the no-discount rule in quasi-partnership cases is not absolute. Specifically, the petitioner’s own conduct can affect the position. The leading authority is Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), in which the court applied a discount in a quasi-partnership case where the petitioner’s behaviour justified it. Likewise, in Davies v Lynch-Smith and others [2018] EWHC 2336 (Ch), the court applied a 60 per cent discount on the basis that the petitioner had behaved in a way that meant he should be treated as a willing seller rather than as someone being forced out.

Crucially, the practical lesson is that the petitioner’s own conduct matters. Specifically, even a strong unfair prejudice case can be undermined by behaviour that the court considers makes the petitioner a willing seller. As a result, family business owners contemplating an unfair prejudice claim need to take advice on their own conduct as well as on the conduct of the respondents. For more on these dynamics, see unfair prejudice petitions.

The date of valuation

Importantly, the date at which the shares are valued can make a significant difference. Specifically, the court has wide discretion to choose the valuation date. The main options are these.

First, the date of the petition. Specifically, this is the default position because it reflects the situation at the time the court was asked to intervene. Second, the date of the order. Importantly, this can capture changes in value that have occurred since the petition was filed. Third, the date of the unfair conduct. Crucially, this is sometimes appropriate where the unfair conduct itself has reduced the value of the shares. Fourth, some other date entirely. By contrast, this is rarer but the court can do it where the circumstances justify it.

In practice, the leading authority on the date question is Profinance Trust SA v Gladstone [2002] 1 WLR 1024, in which the Court of Appeal confirmed that the starting point is the date of the order but that the court has wide discretion to depart from it. Importantly, the choice of date is often strategic. Specifically, a date before the unfair conduct can produce a higher figure where the conduct has destroyed value. By contrast, a later date can capture growth in the business that the petitioner contributed to.

Adjustments for the working family members’ conduct

Crucially, where the working family members have run the business in a way that has affected its value, the court can adjust the valuation. Specifically, the most common adjustments include the following.

• First, adding back excessive remuneration. Importantly, where the working family members have paid themselves above market rate, the excess can be added back to the maintainable earnings. As a result, the valuation increases.
• Second, adjusting for related-party transactions. For example, where the company has paid above-market rent to a property company owned by the working family members, the excess can be added back.
• Third, adding back the value of company assets used personally. Specifically, this is the issue that arose in Re Sam Weller & Sons Ltd [1990] Ch 682, where the company had bought a seaside holiday home for the working family members.
• Fourth, removing the impact of suppressed dividends. By contrast, where dividends have been kept artificially low, the court can value the shares as if the dividend policy had been reasonable.
• Finally, restoring corporate opportunities that were diverted. Specifically, where the working family members have taken opportunities for themselves that should have been the company’s, the court can value the shares as if those opportunities had been taken by the company.

For the wider pattern these adjustments address, see the have and have-not pattern.

The cost of valuation evidence

Importantly, valuation evidence is one of the most expensive components of a family business dispute. Specifically, a single joint expert report typically costs between £15,000 and £50,000. By contrast, where the parties instruct separate experts, the total cost can exceed £150,000. Crucially, the expert evidence stage often adds 6 to 12 months to the timetable of a contested unfair prejudice petition. As a result, the cost of valuation alone can be significant.

Importantly, the courts have become increasingly impatient with disproportionate valuation litigation. Notably, the judge in Re Solent Garage Services Ltd observed that the legal costs of the dispute were likely to have exceeded the gap between the parties’ rival positions on valuation. As a result, the court took a deliberately broad-brush approach to keep the costs proportionate. Crucially, this is now common practice in smaller family business disputes. For more on the cost picture, see the cost of family business litigation.

Single joint experts and party experts

By contrast, the parties to a family business dispute have a choice about how to instruct experts. Specifically, the options are these.

First, a single joint expert. Importantly, this is the default position in smaller cases and is encouraged by the court. Specifically, the parties agree on one expert who is instructed by both sides and provides a single report. As a result, the cost is significantly lower than instructing separate experts. By contrast, the parties have less control over the report and less opportunity to challenge it.

Second, separate experts. Specifically, each party instructs its own expert who produces its own report. Importantly, the experts are then required to meet and produce a joint statement identifying areas of agreement and disagreement. As a result, this is more expensive but gives each party more control. Crucially, separate experts are usually justified only where the figures in dispute are substantial enough to make the additional cost worthwhile.

Importantly, the court has wide discretion to direct the form of expert evidence. Specifically, where the figures are small, the court will usually direct a single joint expert. By contrast, where the figures are large, separate experts may be permitted.

Adjustments before valuation: cleaning up the picture

Crucially, in many family business disputes, the valuation cannot proceed until certain preliminary issues have been resolved. Specifically, the most common are these.

First, the directors’ loan accounts need to be agreed. Importantly, family businesses often have complex directors’ loan accounts that have built up over many years. Second, the related-party transactions need to be analysed. Specifically, this is often the most contentious part of the analysis. Third, the personal expenditure paid through the company needs to be identified. Crucially, this often produces surprises for everyone, including the working family members who had not realised how much had been routed through the business. Fourth, the assets that may have been misappropriated need to be valued. Finally, the historic dividend policy needs to be reviewed.

Importantly, these preliminary issues can take months to resolve. As a result, the valuation date and the methodology often have to be revisited as new facts emerge. Crucially, this is one of the reasons why valuation litigation is so expensive and time-consuming. By contrast, parties who agree to mediation often resolve the preliminary issues alongside the headline question of valuation in a single process.

Valuation in cases other than unfair prejudice

By contrast, family business valuation also arises outside the unfair prejudice context. Specifically, the most common alternative situations are these.

First, valuation on divorce. Importantly, the Family Court will need to value the family business shares for the purposes of the financial settlement. As a result, the methodology and the discount question apply in a similar way, but the legal framework is different. Specifically, family law concepts such as matrimonial and non-matrimonial property come into play.

Second, valuation on death. Specifically, the executors will need to value the family business shares for inheritance tax purposes and for the administration of the estate. Importantly, business property relief and other tax reliefs can significantly affect the figure. As a result, the valuation in this context can be heavily influenced by tax considerations.

Third, valuation in a negotiated buyout. Importantly, where the family is negotiating a buyout rather than going to court, the valuation methodology is a matter for agreement between the parties. Specifically, the shareholders’ agreement may specify a methodology. By contrast, where the agreement is silent or where there is no agreement, the parties have to negotiate from first principles. For more on this, see shareholders’ agreements for family businesses.

Tax considerations in valuation

Importantly, tax considerations often affect the practical outcome of a family business valuation. Specifically, capital gains tax, business property relief and corporation tax all come into play. As a result, the same valuation figure can produce very different net outcomes depending on the tax treatment. Crucially, the parties to a family business dispute should take tax advice alongside the legal advice. Specifically, this is particularly important where the structure of the buyout can be designed to take advantage of available reliefs.

Importantly, the courts cannot impose a particular tax-efficient structure on the parties. By contrast, where the parties agree, they can structure the buyout in ways that minimise the tax impact for both sides. As a result, mediation often produces better tax outcomes than litigation, because the parties can shape the deal themselves rather than accept what the court orders.

Frequently asked questions

What is the difference between fair value and market value?

In short, fair value is the standard the court applies in family business dispute valuations. Specifically, fair value takes into account the conduct of the parties, the structure of the company, and the purpose of the valuation. By contrast, market value assumes a sale between a hypothetical willing buyer and a hypothetical willing seller in the open market. Importantly, fair value can be higher or lower than market value depending on the facts.

Will a minority discount apply to my shares?

It depends. Specifically, in a quasi-partnership case the court usually values the shares without applying a minority discount. By contrast, in a non-quasi-partnership case a minority discount usually applies. The leading authorities are Re Bird Precision Bellows Ltd [1986] Ch 658 for the no-discount rule and Strahan v Wilcock [2006] EWCA Civ 13 for the default discount position. Importantly, the petitioner’s own conduct can also affect whether a discount applies.

What date will the court value my shares at?

Typically, the court will value the shares at or near the date of the court order. Specifically, the leading authority is Profinance Trust SA v Gladstone [2002] 1 WLR 1024. However, the court has wide discretion to choose a different date where the circumstances justify it. For example, the court can value the shares at the date of the unfair conduct where that conduct has destroyed value. As a result, the choice of date is often strategic.

How are the working family members’ salaries treated in the valuation?

Generally, where the working family members have been paid above market rate, the excess can be added back to the maintainable earnings of the business. As a result, the valuation increases. Specifically, this is one of the most common adjustments in family business valuation disputes. Importantly, the working family members can defend their salaries by showing that they are reasonable for the roles performed. For more on this, see the have and have-not pattern.

How much does family business valuation evidence cost?

Typically, a single joint expert report costs between £15,000 and £50,000. By contrast, where the parties instruct separate experts, the total cost can exceed £150,000. The valuation evidence stage often adds 6 to 12 months to the timetable of a contested unfair prejudice petition. As a result, the cost of valuation alone can be significant. Importantly, mediation often produces better valuation outcomes at a fraction of the cost.

Further reading on this site

• Family Business Disputes (main page)
• The Legal Framework for Family Business Disputes
• Unfair Prejudice Petitions
• Quasi-Partnership in Family Companies
• Shareholders’ Agreements
• The Have and Have-Not Pattern
• The Passive Shareholder
• Why Mediation Is Usually the Right Starting Point
• The Cost of Family Business Litigation
• The Most Important Family Business Cases
• Settling a Family Business Dispute
• Direct Access Barrister

Get advice on your situation

Family business valuation is one of the most consequential issues in any family business dispute. Specifically, the valuation can vary by hundreds of thousands of pounds depending on the legal choices that are made. As a result, early specialist advice is one of the most valuable investments you can make. I act as a direct access barrister, commercial mediator and mediation advocate in family business disputes throughout England and Wales.

Call 020 4538 0246, use the contact form, or book a call directly. In addition, my book Winning in Family Business Disputes (forthcoming) covers family business valuation in detail, alongside my published works on shareholder disputes and commercial mediation. Organisations like Family Business United also publish useful guidance for family business owners.

Important disclaimer: This page is provided for general information purposes only and does not constitute legal advice. The content may not be legally accurate for your situation or at all. You must not rely on anything on this page in respect of your legal rights. Before taking or refraining from taking any legal action, you should seek advice from a qualified lawyer. I disclaim any and all liability for any loss, damage or expense howsoever caused by reliance on the contents of this page. If you would like advice on your specific situation, contact me here.