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Independent business valuations of an early stage internet and family business

Reference: P269

Appointment Type: Expert advisor

Service Area: Valuations

Industry: IT

Sub-category: Other

Litigation Type: Civil

Independent business valuations were required due to the claimant’s case of proprietary estoppel and his belief that his parents would leave him their entire estate. When the remaining parent died she did not leave the estate to the claimant.

We prepared an expert report providing independent business valuations of two businesses at various dates and a joint statement. One of these businesses related to an idea for an early stage internet business. The other business to be valued was the family business of the claimant’s parents.

The claimant alleges that at the time of setting up this early stage internet business his parents dissuaded him from developing further this further and instead persuaded him that he should dedicate his time to working in the family business. The claimant’s understanding at that time was that he would inherit his parents’ estate.

Some decades later, the claimant started a similar internet business (by which time the internet business sector had significantly changed). The assumption was that the claimant’s original idea would have developed into the business model of this later business, by taking advantage of how technology and internet usage had developed in the intervening decades. We considered the claimant’s assessment of how he thought the original business might have grown in the period between the original idea and the setup of the later business. To value this business we used a multiple of earnings method, but it was a matter for the court to decide if the company would have developed as claimed by the claimant.

An interesting point concerning valuing this early stage internet business was that the business was only in the very early stages of development at the time the claimant began dedicating more time to the family business. Consequently, there were no contemporaneous financial models, projections or budgets available. Furthermore, the internet business market was at a very early stage of development in the 1990s and the expert found that there was limited information available to assist with assessing how this business might have developed over time. We are not experts in the development of these early stage internet businesses and could not comment upon whether the original idea would have developed into the similar business set up decades later, but we assumed that the business would have followed the same business development pathway as the claimant’s later internet business.

When calculating the loss in value we deducted the value of the later internet business from the valuation of the early stage internet business because if the original business had been developed this successor business would not have been developed. The lost value, therefore, is the difference between these two business valuations.

The valuation dates for the independent business valuations of the family business coincided with the company going through a difficult trading period due to changes in the market and in particular overseas competition. We concluded that the appropriate valuation basis was a net asset basis, due to its financial and trading situation, but there was a lack of contemporaneous financial information and so it required further research and estimation as to what the net asset position might have been at the valuation dates.