Even when minority-shareholder issues don't end up in court, they can cause great unhappiness.

Advisor Bob Maloney, who owns R.E. Maloney Associates in Annapolis, Md., and bills himself as "chief listener," says he has a client involved in one such dispute. She is 90% owner of a beauty-related business in which she's worked for 27 years. Her sister, who doesn't work in the business, owns 10%. The parents left them the firm, and there was a verbal understanding that the 90% sister would buy out the 10% sister, Maloney says. The majority owner did make an offer, but her sister is asking for seven times that, he says.

"It has the potential of destroying the family," Maloney adds. "We suggested we hire a valuation firm to come up with a realistic price. We're offering the full 10% value, no minority discounts."

However, Maloney suspects the sister probably won't accept the offer, and a mediator may need to be hired. The minority owner already has threatened to sue her sister-as well as all of her advisors.

Sometimes, minority shareholders themselves look to business appraisals to confirm the value of their investment. But the news isn't always good. For example, Schroeder says, he worked on an appraisal last year of a credit card company. "The minority shareholders thought the business was very valuable, mostly because they had invested tremendous amounts of money in its future prospects," he recalls. "They had a vested interested in the future of the business. However, the business was only marginally profitable. And its prospects were far less optimistic than the minority shareholders' viewpoint. The business turned out to be only of modest value. This is case where the appraiser was unable to solve the minority shareholders' problems created by their bad investment decisions."

Appraisals also are used to clarify value in other kinds of partnership disputes. For example, Tindall says she recently worked on a breach-of-contract case in which she did an appraisal for a medical practice. The doctor she was hired by believed his former partner breached their contract. The doctor maintained the former partner left the practice and violated a noncompete covenant by opening an office in the same area. The doctor's revenue didn't fall after his partner's departure, Tindall said, but her appraisal showed the doctor's revenue stabilized because his insurance reimbursements had increased. Other factors verified he had, in fact, lost business-more than he anticipated. For example, the numbers of procedures he was performing and patients he was seeing had both dropped after the partner left, she says.

Divorce

Couples getting divorced should get an appraisal if a business is involved. Johanne M. Floser, manager of BST Valuation & Litigation Advisors in Albany and New York City, says either side may hire her, although sometimes the court will appoint an appraiser to provide a neutral valuation. In doing such valuations, she considers court discovery rules, as well as IRS requirements for closely held businesses. The IRS requires that she look at eight elements: the business' nature and history, estimates of risk and future returns, economic and industry conditions, book value and financial condition of the company, earnings capacity, dividend-paying capacity, goodwill and other intangibles, and previous stock sales of not only the company but comparable firms.

Sometimes, the nonowner spouse also will want an appraiser to evaluate the lifestyle of the owner spouse to see if there are any indications of unreported or underreported income, Floser adds.

"There also are instances where an owner spouse alleges that the company no longer exists, that it was dissolved prior to the date of commencement-that it did not exist at the time of divorce," she explains. Different states have different rules regarding the appropriate valuation date for a business. In New York state, for instance, she says, the valuation date is the date the divorce action was commenced. "If the business was not in operation or no longer existed at commencement of the divorce, it would have no value," she adds. Whatever the valuation date, appraisers can't look at events subsequent to that date unless those events were known or knowable, Floser observes.

"A family law judge often is the final arbiter of two different valuations," says Sylvester. "This is where state law applies, and there may be 50 different nuances on what fair value means between spouses."