Everything you Need to Know about Business Valuations but are Afraid to Ask: Dealing with Business Values in Commercial, Family Enterprise, and Family Disputes

The Honourable Judge Nancy Flatters*,
B.A. LL.B. (now J.D.), LL.M., volunteer
dispute resolution/mediator teacher and
trainer
Dr. Larry Fong, R.Psych., Psychologist,
Mediator, Arbitrator, Trainer
Norma Reimer, CA, CBV, Mediator,
Trainer
*on long-term disability
Everything You Need to Know About
Business Valuations but
Are Afraid to Ask
© - Do Not Copy Without Permission1

The Honourable Judge Nancy Flatters*,
B.A. LL.B. (now J.D.), LL.M., volunteer
dispute resolution/mediator teacher and
trainer
Norma Reimer, CA, CBV, Mediator,
Trainer
*on long-term disability
Overview: Everything You Need to
Know About Business Valuations but
Are Afraid to Ask

Overview: Disputes
 Role of Attorney
 Role of Mediator
 Role of an Expert (CVB)
 Context
 Management
 Decision
3
© - Do Not Copy Without Permission

Why Business Valuation in Commercial, Family
Enterprise, Family Disputes? ….From the Field
 Shareholder Disputes
 Financial Damages in Civil Litigation
 Disputes with IRA
 Estate Planning
 Matrimonial Property Settlement
 Spousal / and Child Support
4

Why Business Valuation in Commercial, Family
Enterprise, Family Disputes? ….From the Field
 Shareholder Disputes
 Financial Damages in Civil Litigation
 Disputes with IRA
 Estate Planning
 Matrimonial Property Settlement
 Spousal / and Child Support
5

Why Have a Business Valued?
 Businesses are Complex Assets
 Business is Cyclical
 Each Business Is Unique
 Businesses Can Be a Material Asset
 Value Is Never Obvious
6
© - Do Not Copy Without
Permission

Why Retain A Business Valuator?
 Parties Need an Impartial Number to Move Forward
 Because BV`s know how to do it!
 Minimize liability to counsel & other parties
Besides Business Valuations, Business Valuators Are Also
Retained for…
 Financial Damages
 Financial Analysis – Tracing/Personal v. Business etc.
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Permission

Creative Use of Experts in Conflict Resolution
 Subject of a Talk Yesterday
 Joint Retainer
 Reconciliation of Issues between parties
 Hot-Tubbing
 Behind the Scenes Advising
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Permission

Not All Valuators are Created Equal
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Questions to Clients – get started…
1. What kind of business is it?
2. How did you get started in the business?
3. What is your ownership percentage in the business?
4. Who are the other owners (if not 100%)
5. Why did you start/buy the business?
6. Where is it located?
7. Who is involved in the business? Any Friends and Family?
8. What does everyone do?
9. How many other employees?
10. What assets does the business own?
11. What was last year’s revenue from the business?
12. How is business so far this year?
10 © - Do Not Copy Without Permission

Questions for Mediators - to kickstart
the process
 Do you agree on the value of the business?
 Did you know that there are Business Valuators (`BV`)?
 How are we going to ensure the BV is impartial?
 Let`s discuss the possible ways to hire a BV – joint v. 2 v. report
v. consultative?
 How is the valuation going to be paid for?
 What is the valuation date?
 Who would like to research possible BVs to use?
 What is the education/experience of the proposed BVs?
 What level of valuation reports are available / appropriate for
this assignment?
 Do we agree on complete disclosure of information?
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Business Valuations – Type of Reports
 Consultative services
 Calculation Report
– limited report, heavy reliance on assumptions, conclusion can be largely
based on experience rather than market research
– If matter goes to trial more work or an update may be required
 Estimate Report
– Reliance on assumptions
– If matter goes to trial – Additional work may be required
 Comprehensive Report
– Vetting of key assumptions with 3rd Party support
– Detailed Court Ready Report
– Highest level of assurance

Dr. Larry Fong, R.Psych., Psychologist,
Mediator, Arbitrator, Trainer
Now They Are SO Difficult!
What Happened?
It may be their personalities you say?

Personality Disorders
1. In civil/forensic assessments by psychologists, the
concerns arise over psychological or psychiatric disorder
2. In considering resolution, the impact of personality
problems may arise in valuing a family’s assets, family
business, other corporate/commercial assets
3. Various assessments are used to determine the
relevancy of personality disorders, diagnoses, indicia if
the disorder stage is not reached, and the context of this
assessment as it relates to the psychological difficulty

4. Essentially a Personality disorder is under the class
of mental disorders, as further explained in the DSM-IV
TR
5. The DSM-IV TR in North America is the text for
determination of psychological difficulties, and is well
used in the medical system
6. A personality disorder is characterized by very rigid and
continuous patterns of thought and action
7. Belief systems tend to be rigid and fixed fantasies are
normative
8. Behaviorally, they can be very inflexible, externalize
blame and their behavioral patterns so pervasive it leads
to serious interpersonal, personal and social problems

9. Thinking tends to be impaired
10. The APA defines personality disorder as ‘an enduring
pattern of inner experience and behavior that deviates
markedly from the expectations of the culture and the
individual who exhibits it.’
11. These patterns are inflexible and pervasive across many
situations
12. Their behaviors are ego-syntonic (patterns are consistent
with the ego integrity of the individual) and thus self-
perceived as normal

13. Clinical history suggests that the onset of these patterns
of behavior and thought can be traced back to
adulthood and at times early adolescence
14. Personality disorders are also defined by the ICD-10 by
the World Health Organization
15. Personality disorders are noted on Axis II of the DSM-IV
16. Axis II disorders are more enduring and trait vs. state
oriented

17. Experience and behaviour that deviates markedly
from the expectations of the individuals culture and
manifested in 2 or more of the following:
 Cognition (perception of self/others/events)
 Affect (range, intensity, lability of emotional
response)
 Interpersonal functioning
 Impulse control

The DSM-IV lists 10 personality disorders within 3 clusters:
18. Cluster A (odd , eccentric disorders, suspicious)
 Paranoid Personality Disorder (suspicious, sensitive to rejection,
tendency to hold grudges)
 PREVALENCE: (a) general population = 0.5 to 2.5; (b) inpatient settings = 10 to 30%; and, (c) outpatient
mental health clinics = 2 to 10%
 Schizoid Personality Disorder (emotionally cold, isolate, doesn’t
like contact with others, a rich fantasy world)
 PREVALENCE: uncommon in clinical settings
 Schizotypal Personality Disorder (eccentric/odd ideas/thought
disorders/lack of emotion/emotional reactions
inappropriate/can hear/see strange things: closely related to
schizophrenia (mental illness)
 PREVALENCE: approximately 3% of the general population

19. Cluster B (dramatic, emotional or erratic disorders)
 Antisocial Personality Disorder (doesn’t care about feelings
others, easily frustrated, aggressive, crime oriented, intimate
relations problematic, impulsive no forethought, guiltless and
doesn’t learn from unpleasant experiences
PREVALENCE: community samples (male = 3% & females = 1%); clinical settings = 3 to 30%;
even higher rates are associated with substance abuse treatment/prison/forensic settings
 Borderline Personality Disorder (impulsive, hard to control
own emotions, feels bad about themselves, self harm
(suicide), feels ‘empty’, make relationships quickly but loses
them, paranoid and depressed, and under stress can hear
noises or voices (auditory)
 PREVALEMCE: general population = 2%; outpatient mental health clinics = 10%; and, 20%
among psychiatric inpatients.

 19. <Continued > Cluster B (dramatic, emotional or erratic
disorders)
 Histrionic Personality Disorder (tend to overdramatize events,
self centered, strong emotions that change quickly and end
quickly, suggestible, worry a lot about personal appearance,
crave new things/excitement and can be seductive)
 PREVALENCE: general population = 2 to 3%; inpatient and outpatient = 10 to 15%
 Narcissistic Personality Disorder (strong sense of self
importance, fantasy of unlimited success, power, intellectual
brilliance, crave attention from others, show few warm
feelings in return, exploitive, ask favours but not returned)
 PREVALENCE: clinical populations = 2 to 16% and general population = less than 1%

21. Cluster C (anxious or fearful disorders)
 Avoidant Personality Disorder/Anankastic (worry/doubt a great deal,
perfectionist, always checks on things, rigid in thinking/behavior;
cautious and preoccupied with detail; worry about doing the wrong
thing, find it hard to adapt to new situations, have high moral
standards, judgmental, sensitive to criticism, can have obsessional
thoughts/images
 PREVALENCE: general population = 0.5 to 1% and 10% of outpatient mental health clinics
 Dependent Personality Disorder (not Dysthymia): very anxious /tense,
worry a great deal, feelings of insecurity/inferiority, have to be
liked/accepted; extremely sensitive to criticism
 PREVALENCE: among most frequently reported Personality Disorders in mental health clinics
 Obsessive-Compulsive Personality Disorder : tend to be very passive,
rely on others for their own decisions, do what other people want you
to do, find it hard to cope with daily chores, feels
hopeless/incompetent, easily feels abandoned
 PREVALENCE: 1% in community samples; and, 3 to 10% in mental health clinics

22. Research suggests that childhood abuse histories were
found to be definitively associates with greater levels of
symptomology
23. Severity of abuse was found to be statistically significant
24. Child abuse and neglect consistently evidence as
antecedent risks to the development of adult personality
disorders
25. In studies, the sexually abused group demonstrated
higher levels of psychopathology

26. Officially verified physical abuse showed a high level of
consideration towards antisocial and impulsive
behaviors
27. Two UK University of Surry psychologists (2005),
interviewed high level British executives and found that
3/11 personality disorders were more common in
managers than criminals:
 Histrionic personality disorder includes superficial charm,
insincerity, egocentricity and manipulation
 Narcissistic personality disorder includes grandiosity, lack of
empathy, exploitativeness and independence
 Obsessive-compulsive personality disorder includes
perfectionism, excessive devotion to work, rigidity,
stubbornness and dictatorial tendencies

28. They described business persons in their study as
successful psychopaths versus criminals as unsuccessful
psychopaths
29. Most recently, the B Scan, partially developed in the UK
with Dr. Hare of UBC in British Columbia, Canada formed
an assessment to determine psychopathy in business
30. Like the P Scan, used by many world wide in the
assessment of psychopathy, the B Scan looks at
individuals who may create havoc and take advantage of
business
31. See the literature and news about those who steal from
their own or from businesses (fiscal malfeasance etc.)

32. Exacerbating difficulties can include: problems with
family/ partner, finances, anxiety/depression/other
mental health issues; the use of a great deal of substances
33. Medication of assistance includes antipsychotics to
reduce suspiciousness of Cluster A
(paranoid/schizoid/schizotypal)
34. With borderline personality disorder, antipsychotics can
help with paranoia and auditory (hearing voices or noises)
35. Antidepressants (SSRI) can help with mood and emotion
for Cluster B and as well with impulsivity and aggression
36. Antidepressants can help with Cluster C anxiety

a. The enduring patterns remain inflexible and pervasive
across a broad spectrum of personal and social venues
b. The enduring pattern leads to clinically significant distress
and impairment in social/occupational/other important
areas of function
c. The pattern is stable and of long duration and the onset
can be traced to adolescence or adulthood
d. The enduring pattern is not better accounted for as
manifestation of another mental disorder
e. The enduring pattern is not due to the direct physiological
effects of a substance/general medical condition (head
injury)

37. What causes personality disorders? Unclear - some
evidence where children who suffer from physical/
sexual abuse, violence in the family, or substance
abusing parents, may be more prone to this disorder
38. Early problems in childhood such as disobedience/
severe aggression/impulse control/temperament
difficulties/familial disruption increase proneness
39. Some individuals with antisocial personality disorder do
show some differences in brain function - the new area
of brain scans can help understand problems. This
remains the same for the psychopath and brain function

40. Personality disorders in the population vary-issue: context
41. As an approximate example: general population may
experience antisocial personality disorder <6% for males
<2% for females
42. In psychiatric wards, personality disorders can predominate
between 40 to 70% of patients
43. A clinical or psychiatric service in the community will
demonstrate personality disorder up to 30-40%
44. Approximately 10-30% of patients seeing their physician
will have a personality disorder
45. Age is a predominant factor for some personality disorders
(APD) and tend to reduce from age 30 on

For more information see the DSM IV-TR. Excerpts of this presentation is from the
Royal College of Psychiatrists, 17 Belgrave Square, London (UK) or www.rcpsych.ac.uk
Dr. Larry Fong, R. Psych.
115, 1st Street SW
Calgary, AB
Canada T2P 0B3
www.fongmediation.com
www.worldpsych.ca
Email: lsfong@web.net or fong@worldpsych.ca

Working with Clients:
Using Questions
Dr. Larry Fong, Psychologist, Mediator, Arbitrator
Questions, Questions, Questions, and Approaches

Questions Using Difference
Dr. Larry Fong, Psychologist, Mediator, Arbitrator
Difference questions to make a difference

Difference Questions
 Cybernetic theory is about communication styles and
control processes in systems
 Bateson described receiving information as ‘any
difference that makes a difference’
 The mediator, in Milan style, is constantly scanning for
these differences
 Milan mediators promote the use of questions that
respect dignity and respect of all through questions
versus statements
 With questions, a mediator can rarely be wrong because
the person who answers the questions is ultimately
responsible for the answer

Difference Questions
 When making statements, the mediator may be misled in
that the mediator is making a statement based on an
evaluation. They have lost their curiosity and are
becoming more judgmental.
 Too many statements can lead to opposition from the
clients
 Statements can be made if everyone in the room does
not object to this and further accepts the statement
 Clients generally want less judgment, and
statements/advice than questions, which make clients
‘think about their thinking’
 Statements do not assist clients in ‘thinking more about
their thinking’. They satisfy the asker of the questions.

Between Persons
How is one person different from the other? Or others?
Can the mediator ask questions that allow for differences
on an environment of safety and respect?
Question: What is the difference in the way you manage
the company and the way the previous manager did their
job? Does you vision differ from the other managers?

Between Relationships
How is one or more relationship different or the same?
Are some relationships more important that the other?
Are some relationships more long term?
Question: Is there a difference in your relationships with
your fellow partner/s or workers now that the business is
on the table? What are they like now? What are you like
now?

Between Perceptions, Ideas, or Belief
How do these differences in how someone believes,
thinks, or sees things, make a difference in your
perceptions, ideas, or beliefs?
Question: Does the way you think about the problem
interfere with you working toward resolution in an
efficient, effective and cost managed way?

Between Actions or Events
When people see an event occur and it is different that
another’s idea of that event, how does it allow tem to tell
their story? Is it a clash of differences?
What will a mediator do to reconcile these differences?

Between (A to D) Differences:
in the Past Questions
These questions intermingle all of clauses a to d, with only
the past. They are not as powerful as future questions but
allow for compromises.
Question: If you could resolve some problems in the past
between the two of you, what type of protocol would you
use to resolve the conflict?
Past questions are about “where you have been.”

in the Present
These questions are used for comparison sake and bring to
the client’s attention “where you are.”

in the Future
These questions are used for comparison sake and as well
to bring to the attention of the clients “where they can
be.” Thus, future questions are full of possibilities and
probabilities.
Questions of the past and present are not about
possibilities and probabilities.
Questions in the future are more hopeful, not hopeless.

in the Future
These questions are used for comparison sake and as well
to bring to the attention of the clients “where they can
be.” Thus, future questions are full of possibilities and
probabilities.
Questions of the past and present are not about
possibilities and probabilities.
Questions in the future are more hopeful, not hopeless.
v. June 2012

Systemic Model for Questioning
Lineal Questions:
 questions which are anecdotal in
nature
 can be informative but not meant to
be stimulating nor provocative - open
 questions are good examples
Relational or “Circular” Questions:
 questions of a difference must
make a difference
 is a “circular” or relational question
when question asks a difference
between two of something
 behavioral effect questions are an
example of relationship questions
Strategic Questions:
 questions that lawyers might use
 meant to elicit one type of
response, such as “yes” or “no”
 asker of question might already
know what the answer might be
 can be confrontive questions or
leading questions
Reflective Questions:
 questions that ask clients to
ponder or reflect
 meant to be provocative but not
meant to be judgemental like
strategic questions
 hypothetical future questions are
examples

Temporal Difference Questions (Time)
Past (events, perceptions, etc) Past
Past Present
Past Future
Present (relationships, etc) Future
Future (beliefs, persons, etc) Future
a. Past to Present to the
Future
a. Two past events leading
to Future
b. Two or more Future
events
b. Present events that
emulate Past

Norma Reimer, CA, CBV, Mediator
Trainer
Clients and Focussed Questions:
Information, Information, Information:
questions of difference, context, time in BV

I.U.V.D.* – It All Starts Here – Mediator
& Valuator Perspectives
• I = Identify … The BV needs lots of assistance
with Disclosure!
• U = Understand
• V = Value
• D = Divide (Tax assistance? ?)
* As per Dr. John Haynes

I. & U. – it all starts with - Financial
Statements -- but they aren`t all created equal
Financial Statements Have Different Types of Assurance
 Audited = Highest Assurance
 Review Engagement = Next Assurance
 Notice to Reader/Compilation = Lowest of externally
Prepared
 Internal Financial Statements

(FYI Financial Statements 101)
 Income Statement – Revenue earned and expenses
incurred over a period
 Balance Sheet – Snapshot in Time – Assets, Liabilities,
Shareholders’ Equity
 Cash Flow Statement – expression of a business’s activities
impacting cash
 Don`t Forget About the Notes! Important information like
related party deals, debt covenants, going concern issues.

The BV`s I. U. & V.
1. The BV will have many questions for the parties active in
the business
2. The BV should do internal and external research of the
subject business and the industry in which it operates.
3. The BV should provide an easy to follow financial analysis
leading to their conclusions
4. The BV should disclose all assumptions
5. The BV should disclose all scope restrictions
Most of this should be obvious in the BV`s report (unless it is
short-form). However, think about asking the following
questions. (see next slide)

For Mediators: Some Questions about
the Valuation Report
1. Were all your questions answered by the parties?
2. What did your internal and external research of the
subject business and the industry in which it operates tell
you?
3. Could you lead us through your financial analysis ?
4. What were your major assumptions?
5. Did you have any scope restrictions?
6. How confident are you in your conclusions?
7. Did you have enough time to complete your report?

Business Valuation Definition =
Primary Term of Reference !
• Fair Market Value = TYPICAL DEFINITION USED!!
– Highest Price Available
– In an Open Market
– between Prudent Parties both Willing to Transact
– in terms of Cash
– at a Point in Time – WHAT IS THE VALUATION DATE!!!
• Fair Value: USED IN RARE CIRCUMSTANCES
– Typically been interpreted by Courts to mean fair market value without application of minority discount
• Value to Owner: ONLY TYPICALLY USED FOR EXPROPRIATION BUT MY BE IN THE MIND OF ONE OF YOUR PARTIES
– Refers to all economic and non-economic benefits that accrue from ownership.
– Value of a business interest under this methodology may be materially different than fair market value given.
– Business Owner may generate excess returns due to his personal contacts / knowledge (personal goodwill)
51

Approaches to the Business Valuation
– Value of net assets
 Investment holding companies
 Real estate holdings
 No commercial goodwill (key man issue)
– Capitalization of maintainable earnings / cash flow
 Earnings are generated from active business
 Likely large portion of earnings would continue if sold
(transferability of profits)
– Discounted Cash Flow vs. Market Based Approach
– Rules of Thumb
– Liquidation value (if not considered going concern)
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Permission

What the Heck Is Goodwill
 Amount of Goodwill is one the most contentious valuation issues
 The value attributed to goodwill can vary amongst valuators
 Commercial goodwill value is the difference between the
capitalized earnings less the value of the company’s underlying
net assets (adjusted to fair market value)
 Commercial goodwill assumes a buyer would pay for the future
earnings of the company (over and above the net assets of the
business after a notional fair market wage to the owner
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Commercial Goodwill - continued
 Commercial goodwill may be attributed to among other things:
– Patents
– Brand / reputation
– Location (if so, lease needs to be secure)
– Infrastructure of people (this will likely become more important in
future)
– Customer list
– Competitive advantage
 Reasonability test re: Goodwill – What would realistically
happen if owner got hit by a bus?
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Summary: Common Issues Impacting
a `BV’s Effectiveness and Outcomes
 Important financial / background information includes:
– Every file’s requirement is unique but minimum includes
– Financial statements (5 years), Corporate Tax Returns, Amounts
paid to non-arm’s length parties, background information as
nature of business (# customers, important supply
arrangements, key employees), important contracts
– Key asset appraisals
– Information needed for damage analysis much more detailed
 Experts often viewed as an additional cost rather than investment
– In our experience, successful outcomes typically are situations
where the expert viewed as part of litigation team and involved
throughout process
– Proper information may allow earlier settlement

Summary: Common Issues Impacting a
BV’s Effectiveness and Outcomes
 Negotiated timelines do not adequately consider time required by an
expert to perform their analysis
– Scrambling to prepare report on a deadline
– Increases the likelihood of making key assumptions (perhaps
could have been proven earlier)
– Experts may not have sufficient time to prepare proper analysis
 Our role not adequately defined
– Is engagement with counsel or client
– Maintaining an independent perspective
– “Advisory Expert” versus “Court Expert”

Questions?

Everything you Need to Know about Business Valuations but are Afraid to Ask: Dealing with Business Values in Commercial, Family Enterprise, and Family Disputes

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Everything you Need to Know about Business Valuations but are Afraid to Ask: Dealing with Business Values in Commercial, Family Enterprise, and Family Disputes