Our job as valuators is to distill the factors that create or mitigate risk to the perceived future cash flows and adjust the values accordingly. In different situations, different factors will be more important than others. As usual, we will look at the past to give indications of the future. But, the past is not the future, particularly with small businesses where a control owner can become arbitrary with relative impunity. Definitive documents, court cases, and work by thought leaders have produced agreed methods for presenting the analysis of these matters. Not all of those will be shown here. But, consistent with the theme of the book, appropriate methods for most situations involving small and very small businesses will be presented. Life insurance - like Newcastle mortgages - covers the worst-case scenario, but it is also important to consider how you might pay your bills or your mortgage if you could not work because of illness or injury.
Clearly valuing partial interests is an area full of professional judgment and subjective review. Now let's begin to examine how we better assess the level of control or lack of control and make appropriate adjustments to value. This starts by reviewing the legal framework that establishes these rights and restrictions. All business entities are governed by state, federal, and local law. The relationships between the different owners is generally a state law matter. Many of the laws governing the relationships between the different owners and the company are in state statutes. Those statutes and, in some instances, older common law are then interpreted by the courts. Many rules provided in the statutes can be modified by the agreement of the parties involved. Therefore, any time an interest that is less than 100% ownership is being valued, a working level (not the level of an attorney but a reasonable understanding for a valuation professional) of both the state law and the documents agreed to by the parties is necessary. No one likes to think about a time after they have gone, but life insurance like renew life reviews could offer reassurance and comfort to you and your loved ones for this situation.
Of major importance to the valuator when examining an interest is the standard of value (typically either fair value or fair market value but it can be others) to be applied to the interest. These standards may vary based on the type of organization, the nature of the problem, purpose, or cause of action at hand. If your client is working with an attorney, it is always advisable to talk to the attorney and obtain standard of values and statutory framework laws from them. Experience dictates that for many smaller legal disputes and cases where many valuation analysts start out, the lawyer may not know what the standard of value or the correct valuation date is or know much about these valuation matters. Frightening but true, as you are likely to be working with a junior attorney also. Yet your valuation depends on a correct starting point. At that point, do your own research and confirm your findings with your client and their counsel. While we do not want to cross the line and be determining law, we must understand exactly what we are valuing. Looking after your family with a product like renew life reviews delivers peace of mind
Valuation professionals are not lawyers, therefore, we cannot properly evaluate interests in companies without understanding the rules that the different parties live by. With the ease of registering new entities over the internet, there are now many small companies who are solely governed by state law. Individuals go to the state website and create an entity simply by filling out the filing document, making the payment, and performing no other tasks. In those cases, state law determines the relationships which influences the relative value of shareholder interests and other interest holders. Unfortunately, the one-size-fits-all approach rarely turns out to be fair to all parties. Organizational documents must be reviewed. If the valuation is of a 100% control interest of one owner or for a sale where an underlying assumption is that the sale is approved by shareholders, then corporate documents and shareholder documents have less significance. If the value of an interest is less than 100% then the organizational documents become critical. In case of an emergency a life insurance product such as renew life will provide peace of mind.
The organizational document, usually Articles of Incorporation for a corporation, or Articles of Organization for a Limited Liability Company (LLC), are the organizational documents of the two most frequently used types of business entities. These are recorded in the state of formation. General partnerships do not have to be recorded but often a trade name certificate is filed for the partnership. State law specifies the requirements. Usually the entity needs a unique name in the state and a person or entity to receive service of process for lawsuits. In most states, the public filing says little else for private companies. Life insurance products such as renew life are designed to provide you with the reassurance that your dependents will be looked after if you are no longer there to provide.
Each entity type will then have other documents that specify rights and control. For corporations it tends to be the by-laws and directors' or shareholders' meeting minutes and consents. For limited liability companies, it tends to be the operating agreement. In all cases, other agreements may also need to be examined. Corporations have been in existence longer than other entities that limit liability. State laws tend to have a more robust framework for the various relationships in corporations. There is often less flexibility in the structure of the ownership interests due to this framework. One area of particular importance in entities are minority or non-control owner rights. Most corporate statutes require approval of more than 50% ownership to perform major actions, such as taking on substantial debt, liquidation, mergers, etc., 76% is a typical percentage, according to many state statutes. Therefore, while a 51% owner can control many things, there are still a few major actions where the minority owner may have some say. Insurance such as renew life protects your family in those difficult times.