Business Valuation and Shareholder Dispute: a Baseball Allegory

The story is written as an allegory within?the framework of a baseball game so it's a belated Father's Day nod to my dad who taught me all I know about baseball.

Relax, even if you don’t know a dugout from a doughnut, this should make sense.

Anyone who knows me?knows that I’m BIG baseball fan so I thought I’d have some fun and give you some words from our national game (I know… more Americans watch the NFL and NASCAR but just be a pal and let me finish).?Don’t worry, the whole thing will come back home and make it'll all make sense eventually.

• ?“Baseball, it is said, is only a game.?True.?And the Grand Canyon is only a hole in Arizona.?Not all holes, or games, are created equal.”?- George Will

• ?“What does it take to be a great manager? Great players.” Casey Stengel

• ?“The future ain't what it used to be.”?- Yogi Berra?

Here’s a TRUE story, played out like a baseball game and sprinkled with some colorful baseball terms.?

The Lineup:??????

Two guys formed a company.?Let's call them "Mr. Koufax" and "Mr. Cobb"?

• Koufax was the operations guy and Cobb provided capital.?
• Cobb owned 51%, was president but had little business experience.
• Koufax owned 49%, was an industry veteran and handled day-to-day operations.
• Koufax was cerebral and methodical, Cobb was impetuous and cantankerous.

1st?inning:

The Company was profitable and growing.?The sky was blue, the grass was green, and things were good.?

2nd?inning:

Koufax and Cobb had a falling out (a “rhubarb”).?They differed on how the company should be run and Cobb figured he could run things himself so?he fired Koufax (you see what's happening here, right?).

3rd?inning:

Cobb pretty much struck out as a manager and profits plummeted (like a?“Texas leaguer” or a "dying quail").?He was simply very bad at this.

4th?inning:

This is what is called a “business divorce”.?The Company’s operating agreement required that the Company buy Koufax’s shares and therefore, someone, needed to do a valuation of the company to set the price.?Now it gets tricky.?????????

5th?inning:

After the two sides engaged in much arguing,?gnashing of teeth,?spitball throwing and “chirping,” I was engaged to figure out the fair value of Koufax’s shares (So enter ME as the relief pitcher, or “fireman”).?

Under NY State law, the company must be valued (at “Fair Value”) as it existed immediately before the “triggering event” (when Cobb fired Koufax).?

So even though we are in the bottom of the 5th inning, we have to pretend we are still in the top of the 2nd inning.?Got it??OK.

6th?inning:

Because a company’s value is a function of its?future?cash flows and the riskiness of those cash flows, we’ve gotten ourselves into a strange situation (caught in a “hot box” or a “pickle”).?

Back in the 2nd?inning, there were really?two?“futures” for this company:??

(1) the?actual?one with Cobb running things right into the ground and

(2) the one where the law says we have to?assume?the firing never happened and Koufax is still in the game.

7th?inning:

I did my analysis of the company, the industry, and other important factors and it was clear that if not for the feud, the company would likely have continued its profitability and growth (probably?would have made the playoffs, and maybe even won the pennant).?

OK, time for the?7th?inning stretch…get?up, stretch and sing "Take Me Out To The Ballgame"

So, the?ACTUAL?"future" certainly was?NOT?what it used to be but according to the?law, the “future”, for valuation purposes, actually?WAS?what it used to be (with Koufax running things).?Sorry about that Yogi.?

8th?inning:

Koufax and Cobb argued?in court (a real "bench clearing brawl").??Cobb's attorney?asserted that the company should be valued based on its poor financial performance?(see 5th?inning above) because Cobb wanted to pay Koufax a low price.?Koufax's attorney?asserted that if Koufax were still in the game, the Company would be in good shape.?

9th?inning:

The judge (the Umpire or we just call him “Blue”) agreed with Koufax, accepted my valuation, and ruled that the Company pay Koufax for his shares based on what things looked like?just before?the trigger event.?

GAME OVER.?Koufax 1, Cobb 0.??

Hopefully you enjoyed that and it was easier to follow than “Who’s on First.”?