3 share valuation errors that end in court

Omitting the discount for lack of liquidity and control

In March 2024, we worked on a dispute in a transport company near Warsaw. One of the partners held 12% of the shares and believed that he was entitled to money calculated directly from the division of the company's assets. He forgot that a minority share package is worth much less because it does not give real control over the management. In Polish business practice, such a discount often amounts to 22% or even 34% of the base value. When we showed him specific data from 7 similar transactions in the region, the temperature of the talks quickly dropped.

Lack of liquidity is another factor that partners ignore until they sit down at the table with an analyst. Shares in a small limited liability company are not shares on the stock exchange that can be disposed of in 3 minutes. The sales process usually lasts from 5 to 11 months. If the valuation does not take into account this time and the difficulty in finding a buyer, it becomes pure fantasy. In the case of the mentioned transport company, failure to include these parameters created an expectation gap of 187,000 PLN, which almost led to the breakdown of talks.

A minority share package is not simple mathematics. Without control over the company, your 15% is worth less than you think.

Relying on book value instead of market value

Many people still think that a balance sheet prepared by an accountant is the ultimate oracle on the issue of company value. This is an error that in 2023 led to the blocking of 14 company exit processes in which we advised as Arka Przymierza. Book value consists of historical records, often having nothing to do with how much someone will actually pay for the business today. We had a case of a production plant near Grojec where machines purchased in 2017 appeared in documents with a high value, even though their market price had fallen by 48%.

On the other hand, a balance sheet rarely shows real assets, such as a base of 84 regular customers or signed contracts for the next 2 years. In one of our cases, the departing partner wanted to receive 310,000 PLN, based on the 'paper' value of the assets. After a reliable valuation using the income method, it turned out that the company is worth 92,000 PLN more thanks to unique know-how. Ignoring these differences is the shortest way to appointing a court expert, which costs an average of 8,000 PLN and more and lasts for months.

The balance sheet tells you what you bought yesterday. Market valuation tells you what the company will earn for you tomorrow.

Valuation done by a 'friend' advisor

A common mistake is involving a person who has been serving the company for years for the valuation. Such a person, even acting in good faith, is burdened by the history of relations with the partners. In August last year, we saved a transaction in the IT industry where the valuation prepared by a long-term advisor was rejected by the buying side as extremely biased. Lack of objectivity cost the parties 4 weeks of unproductive arguments and 12,000 PLN spent on documentation that ended up in the bin.

Professional valuation requires the cold look of someone from outside who does not drink coffee in the same kitchen as the management. At Arka Przymierza, we always suggest choosing an independent analyst who uses proven methods: comparative or DCF. In a dispute between two partners from Poznan, only a report prepared by a third party allowed both men to consider the amount of 540,000 PLN as fair. Previously, each of them operated with their own 'expert opinions', which were separated by a gap of 230,000 PLN.

Failure to take into account industry specifics in the choice of multipliers

Applying general market indicators to specific niches is a simple path to financial disaster. We encountered a situation where a partner in a construction wholesaler tried to value shares using multipliers from the technology services sector. This is like valuing a farm tractor according to rates for sports cars. The discrepancy was huge and amounted to 43% of the final value. Every industry has its specific risks, such as inventory turnover or dependence on 3 key suppliers, which must find reflection in the numbers.

At Arka Przymierza, we analyze specific parameters for a given sector. For example, in retail trade, a net margin of 4.2% means something different than in tax advisory. During mediation in December 2023, we showed partners that their margin is 1.5% lower than the market average for 12 similar entities. This allowed the share price to be made more realistic and avoid accusations of attempted fraud. Without this analysis, the case would have ended in the commercial division of the district court.

Don't use multipliers from outer space. The furniture industry is not Silicon Valley and is governed by different laws.

How to break the deadlock and close the transaction

If the valuation has become a bone of contention, the only way out is to return to hard facts. The solution is not another argument, but appointing a joint arbitrator or mediator who will help establish the rules of the game. We close disputes, we open businesses – that's our principle. Often one 3-hour session is enough for both sides to understand that the cost of a court process (which can amount to 15% of the value of the subject of the dispute) will eat up all their profit from this transaction.

Remember that valuation is just a tool to achieve a goal, which is a peaceful parting and protection of the company's assets. At Arka Przymierza, we have already helped 156 clients go through this process without destroying personal relationships. Discretion is our standard, which is why we conduct all analyses in a narrow circle, avoiding publicity that could harm the company's reputation. Instead of waiting for a court summons, it is better to sit down at the table with a concrete spreadsheet.