Dr. Vladimir Starkov recently testified on behalf of trustees of a family trust in a valuation case heard before the Connecticut Superior Court. The matter involved a detailed request for books and records of a closely held company that provides management services to related closely-held operating companies and investment entities.
Dr. Starkov testified that the valuation of closely held businesses involved in transactions with related parties must include an examination of whether prices charged in all controlled transactions are consistent with the market outcomes. In Dr. Starkov’s opinion, in the cases where controlled transactions are present, the scope of the valuation work may be more detailed than for an ordinary business valuation. For the case in hand, a valuation of a company that provides management services to controlled companies would include an inquiry into whether revenues, operating expenses, and distributions to the shareholders are consistent with the market pricing for similar transactions. If the analysis of the market pricing for comparable transactions indicates that pricing of some or all of the controlled transactions has to be recast to be consistent with the arm’s length outcomes, such restatement may have an effect on the entity’s valuation. In particular, Dr. Starkov testified that the compensation earned by the managers of a closely held company who also own shares in the company has to be benchmarked against the data on compensation of the managers in similar industry, with similar level of responsibilities, and in similar geographical location.
Dr. Starkov’s testimony also addressed the question of whether a valuation of a minority interest in a privately held business should involve making adjustments that are attributable to a controlling position in a business (e.g., adjustments to compensation of the owner-manager of the business). Dr. Starkov testified that even in the case of valuing a minority interest, control-level adjustments may be appropriate because applying such control-level adjustments puts a business on a basis that can be more reliably compared to the guideline market companies. The value of the minority interest is then obtained by applying an appropriate level of discount for lack of control.
Dr. Starkov’s testimony also addressed the differences between the valuation standards such as the “fair value” and “fair market value.”
In a November 2019 ruling, the Connecticut Superior Court judge credited the testimony of Dr. Starkov in finding for NERA’s client.