Executive Summary
Shareholder and partner disputes often hinge on disagreements over finances, transparency and valuation. A forensic accountant and business valuation expert can bring clarity by analysing the books, tracing transactions and applying accepted valuation techniques. This article explains when disputes arise, what methods are used, which documents matter, common pitfalls and how to prepare for litigation.
When this issue arises
Disputes between business partners or shareholders can occur for many reasons, including deadlocks in decision‑making, accusations of funds diversion, minority oppression claims, buy‑sell triggers, dissolution, or disagreements about related‑party transactions. In each of these scenarios, financial analysis is essential to establish the facts and determine a fair resolution.
Accepted methods/frameworks
Forensic accountants use established valuation methods such as the income approach (capitalising or discounting cash flows), market approach (comparing to similar businesses) and asset approach (net asset value). When valuing minority interests, experts may apply a Discount for Lack of Control (DLOC) and Discount for Lack of Marketability (DLOM). For example, imagine a 100,000 USD pro rata value for a minority interest. A 20% DLOM reduces the value to 80,000 USD, and a further 10% DLOC reduces it to 72,000 USD (80,000 × 0.9). This illustrates how sequential discounts are applied.
Documents & Data Checklist
- Shareholder or partnership agreement and operating agreement
- Financial statements (income statements, balance sheets, cash flow statements)
- General ledger and journals
- Bank statements and cancelled checks
- Tax returns and supporting schedules
- Board minutes and management reports
- Schedules of related‑party transactions and capitalization table
- Prior valuations or appraisals
Pitfalls / Common Errors + Rebuttal Strategies
Common errors. Disputes often involve incomplete records, commingling of personal and business funds, disagreements over normalization adjustments, or conflict about the valuation date. Failing to account for contingent liabilities or undisclosed liabilities can also distort the analysis.
Rebuttal strategies. To counter these issues, experts request full documentation, corroborate transactions with third‑party records (e.g., bank statements, tax filings), apply consistent methodologies, and clearly tie out adjustments to the supporting data. Careful documentation helps rebut assertions of bias or error in court.
Frequently Asked Questions
When do business partner and shareholder disputes typically arise?
Disputes arise when partners or shareholders disagree over finances, valuation, control or the future direction of the business, such as during buyouts, deadlocks or allegations of misconduct.
What does a forensic accountant do in these disputes?
A forensic accountant analyses financial records, reconstructs cash flows and identifies discrepancies to provide an objective assessment for negotiation or litigation.
Which valuation methods apply to partnership disputes?
Experts commonly apply the income approach, market approach and asset approach, adjusting for control and marketability to reflect minority interests when appropriate.
What documents should be gathered for a dispute?
Collect shareholder agreements, financial statements, general ledgers, bank records, tax returns, board minutes, related‑party schedules and any prior valuations.
How long does the valuation process take?
The duration depends on the complexity of the business, availability of records and scope of analysis, but it often spans several weeks to a few months.
How can I prepare for a partner or shareholder dispute?
Maintain detailed financial records, seek expert advice early and ensure agreements clearly outline valuation and buyout procedures to reduce uncertainty during disputes.
References
- Exit Strategies Group – Business valuation insights
- Mercer Capital – Valuation insights
- Business Valuation Resources – Industry data
Contact the team at Joey Friedman CPA PA for a confidential consultation to discuss your valuation and litigation support needs. We serve clients nationwide in litigation, disputes, and investigations.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Outcomes depend on specific facts and circumstances.
