The Law Offices of Paul H. Appel – Your Trusted Business Law Partner in New Jersey
Valuation · Legal Guidance
Appraisers determine what a business is worth. Lawyers decide which question the appraiser is asked, who chooses them, and what happens when the owners disagree. Getting those terms right is what prevents a valuation from becoming a lawsuit.
What this service is — and is not
The firm does not appraise businesses. It drafts and reviews the valuation provisions in buy-sell, operating and shareholder agreements, helps clients engage a qualified independent appraiser, and reviews how a valuation report fits the agreement it is supposed to apply.
Numbers come from credentialed business appraisers and accountants, and the firm defers to them on methodology, financial analysis and tax consequences. What often goes wrong, though, is not the arithmetic but the instructions. An agreement that says only "fair market value as determined by an appraiser" leaves open the valuation date, whether discounts apply, who selects and pays the appraiser, and how long the process can take. Each gap is an opening for a dispute.
Valuation questions appear throughout the firm's transaction work: in partner buyouts, family transfers, admitting a new owner, and divorces or deaths that trigger a buy-sell agreement. In an outside acquisition, valuation drives price and structure in a different way — see valuation in acquisitions.
Choosing a pricing method
Each approach balances cost, accuracy and the risk of argument differently. None is right for every company.
| Method | How it works | Main weakness |
|---|---|---|
| Fixed price | Owners state a value in the agreement | Goes stale quickly unless updated every year — and owners rarely update it |
| Agreed annual certificate | Owners sign a new value each year; a fallback applies if they miss a year | Depends on discipline; the fallback must be well drafted |
| Formula | A multiple of earnings, revenue or book value | Simple, but may misprice the business as it changes |
| Single appraiser | One independent appraiser chosen by agreed process | Both sides must trust the selection method |
| Two or three appraisers | Each side picks one; a third resolves a gap, or results are averaged | Slower and costlier, but harder to challenge |
Many agreements combine methods — for example, an annual certificate with an appraisal fallback if no certificate has been signed within a set period.
Drafting points
Standard
Fair market value generally means the price between a hypothetical willing buyer and willing seller. Fair value is a different standard often used by courts in shareholder disputes, and New Jersey courts applying it have in some cases declined to apply discounts that a fair market value appraisal would include. The agreement should say which standard governs.
Discounts
A small, non-controlling interest is often worth less per share than the company as a whole. Whether discounts for lack of control or lack of marketability apply can swing the result substantially, so state the answer expressly.
Timing
Fix the date as of which value is measured — the trigger event, the prior year-end, or another point — and set deadlines for appointing the appraiser and delivering the report.
Process
Specify the appraiser's qualifications, how they are chosen, what records the company must provide, who pays, and whether the result is binding or open to challenge.
Engaging an appraiser
Confirm what the buy-sell or operating agreement requires: standard of value, method, deadlines and selection rules. Following the contract precisely matters if the result is later questioned.
Help prepare the appraiser's engagement letter so the assignment matches the agreement — the interest being valued, the date, the standard and the treatment of discounts.
Coordinate production of financial statements, tax returns, contracts and owner compensation records with your accountant.
Check that the report answers the question the agreement asks, and flag assumptions that conflict with the agreement's terms.
Prepare the purchase documents, note and security for any deferred payment once the price is settled.
When values are contested
Most valuation disputes trace back to an agreement that was silent or ambiguous on a key term. A clear clause with a built-in tie-breaker — a third appraiser, a narrow range within which results are averaged, or mediation before litigation — usually resolves disagreement without a lawsuit.
When a dispute has already developed, the analysis shifts to what the agreement actually requires and whether a court or arbitrator would apply a different standard. In closely held corporations, a shareholder oppression claim under N.J.S.A. 14A:12-7 can lead to a court-ordered buyout at fair value. Contested matters are handled through the firm's business valuation dispute work.
Owners who have not looked at their valuation clause in years should read it now, while relations are cordial. Agreeing on a method is far easier before anyone knows which side of the number they will be on.
Questions
No. A lawyer's role is to define the valuation question and the process, not to produce the number. The firm drafts and interprets valuation clauses, helps engage an independent appraiser, and reviews the report against the agreement. Financial analysis, methodology and tax effects belong to a qualified appraiser and your accountant.
Fair market value is the price a hypothetical willing buyer would pay a willing seller, both informed and under no compulsion, and it often includes discounts for minority or illiquid interests. Fair value is a standard frequently used in statutory and court-supervised buyouts, which may disregard some of those discounts. Which applies depends on the agreement and the context.
There is no single correct method. Smaller companies often choose an annual agreed value with an appraisal fallback; others prefer a formula tied to earnings or a full appraisal at the trigger event. The best choice reflects how predictable the business's value is and how much the owners trust each other to keep the figure current.
That depends on the clause. Well-drafted agreements provide a tie-breaker, such as averaging results within a set range or appointing a third appraiser whose conclusion is binding or bounded by the first two. Without a mechanism, owners may need to negotiate, mediate or litigate, which is why the procedure should be written in before it is needed.
Your attorney
Every matter at the firm is handled personally by Paul — the same attorney reads the documents, gives the advice and negotiates on your behalf.
Contact
Describe what the business is dealing with — a contract on your desk, a deal in progress, a dispute or a company you are about to form. You will hear back from the attorney who handles the work.
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