When a dispute between owners ends in a buyout — by agreement, by statute, or by court order — the fight moves from liability to valuation. Clients are often surprised at how wide the range is. It is not usually because one expert is wrong. It is because valuation depends on legal choices that precede the financial analysis.
“Fair value” is not “fair market value”
These are different standards and the difference is substantial.
Fair market value is what a hypothetical willing buyer would pay a hypothetical willing seller, both under no compulsion. It reflects real-world frictions: a minority stake with no control and no market is worth less per share than the whole company.
Fair value is a statutory or judicial standard used in appraisal and oppression contexts. It commonly means the owner’s proportionate share of the enterprise as a going concern — often without the discounts that a market buyer would insist on.
Which standard applies is a legal question, and it can change the answer by a large multiple.
The three decisions that move the number most
1. Discounts. A minority discount reflects lack of control; a marketability discount reflects the absence of a market. Applied together they can reduce a proportionate share considerably. Whether either applies in a statutory buyout varies by state and context, and it is frequently the most valuable issue in the case.
2. The valuation date. Commonly the date of the triggering event, but the choice matters enormously where the business changed. If the conduct complained of depressed the company’s performance, valuing after it may reward the wrongdoer; valuing before it may ignore genuine market decline. Related is whether events after the valuation date may be considered at all.
3. Normalising adjustments. Closely held company financials often reflect the owners’ arrangements rather than the economics of the business — above- or below-market owner compensation, personal expenses, related-party rent, informal loans. Restating these to market terms is standard practice and routinely contested, because in a small company the adjustments can exceed reported profit.
The methods, briefly
Income approaches — discounted cash flow, or capitalisation of earnings — value the business on its expected future returns. Sensitive to the projections and the discount rate, both of which are argued about.
Market approaches value by reference to comparable companies or transactions. The difficulty is that genuinely comparable small private companies are hard to find and the data is thin.
Asset approaches value the net assets. Usually appropriate for holding companies or where the business is not a going concern, and usually a floor rather than an answer for an operating business.
Most credible valuations consider more than one and explain the weighting.
How to run the valuation phase well
Engage the expert early. Valuation questions shape discovery — what financial records to seek, which years, what related-party detail. An expert retained after discovery closes is working with whatever happens to be there.
Get the legal questions decided first if you can. The standard, the date, and whether discounts apply are legal rulings that constrain the financial analysis. Litigating them early narrows the range enormously.
Expect the adjustments to be the argument. In a closely held company the fight is usually about normalisation, not about the discount rate.
Remember the deal alternative. A negotiated buyout, or an agreed valuation process with a single neutral expert, is often materially cheaper than two experts and a trial — and the difference in cost can exceed the gap between the two positions.