The dissociation is a common event in the business world. In order to assess the company and stipulate the amount owed to the shareholder, different valuation methodologies can be used. Respecting private autonomy, the articles of association can define the form of valuation. Examples of valuation methodologies are: discounted cash flow; market multiples; equity value; and market value, which is used especially when concrete references are available, as is the case with companies with shares traded on the stock exchange or recently sold on the private market. To these methods can be added parameters, criteria, metrics, scenarios, among other aspects that help tailor the valuation to the partners’ vision of the value of the business.
Often, articles of association and shareholder agreements do not stipulate a detailed method for valuing the company. In this situation, the criterion defined by current law is the so-called “determination balance sheet “. Unfortunately, the law on the matter can be quite confusing and it is common for the parties’ lawyers to disagree on what should be taken into account during the negotiation. Most of the time, an understanding can be reached. On other occasions, however, it is necessary to go to court to resolve the issue.
The understanding of the Brazilian Supreme Court of Justice that the assessment by the determination balance sheet should not be restricted to the accounting and tax dimension of the company seems to be dominant today. An example of this is the opinion of Judge Cesar Ciampolini (São Paulo Court of Justice; Civil Appeal 1058804-37.2020.8.26.0100), according to which the determination balance sheet should not follow accounting rules, since the criterion seeks to ascertain the effective value of the enterprise according to market criteria. Despite this, it is common for lawyers and even judges to restrict the assessment to the company’s net worth. It is true that the calculation of shareholders’ equity includes intangible aspects of the business, such as the company’s brand and intellectual property, but this alone is often not enough to arrive at the company’s fair value.
The most common methods used by the market in company valuations seek to fill the gap left by the mere valuation of shareholders’ worth, adding, explicitly or implicitly, other aspects that can be taken as a reference for the value of the business. Some important aspects, which are sometimes left out, are: (a) the company’s projected growth in turnover and profitability, based on the market positioning built up to the time of the valuation; (b) the risks inherent in the business and the forecast of future market behavior; (c) the cost of available capital and the opportunity cost of investing or maintaining investment in the company; among others.
A possible and simple approach to solving this problem is to add goodwill to the value of the company’s tangible assets. Goodwill is an intangible asset that represents reputation, customer loyalty, brand recognition and other aspects that contribute to a company’s value, in addition to its tangible assets and financial metrics. It is notable that part of the scope of Goodwill overlaps with the intangible scope taken into account in the valuation of shareholders’ equity. This is not a problem, since, as has been said, in the valuation of Goodwill it is added to tangible equity, but it does help to realize how important it is to master the tools so as not to end up creating redundancies in the valuation.
To avoid any mistakes when applying these methodologies, it is important to always work with experienced lawyers and financial advisors. Different evaluation instruments can be used or combined for each case. An experienced professional will be able to help the client find those that best suit their business and substantially reduce friction in the negotiation, thereby also reducing the risk of the matter ending up in court.
By: Julia Finelli.
