Situation

A group of six individuals joined together to establish a company that would develop and market a new insurance product for the automotive industry. The company filed a patent for the product and several of the original members quit their full-time jobs to focus on marketing the product. The company eventually established a relationship with a third-party administrator to obtain an insurance carrier and underwriter for the product. The product was then included in a benefits package for new vehicles marketed and sold by a major domestic auto manufacturer.

As part of the deal with the major domestic auto manufacturer, the company would receive a fee for each policy sold in its benefits package. However, two owners of the company were paid fees separately without the consent of the company. Later, in conjunction with an experienced entrepreneur, these two owners started a new business to market the insurance product while leaving out the other owners of the company. The company and its remaining original owners claimed that the other two owners and the third-party administrator breached their respective contracts with the original company. Other claims included a breach of fiduciary duty, unfair competition, and misappropriation of trade secrets.

Engagement

Mariner Capital Advisors was engaged by the plaintiffs’ attorney to provide a written report including an estimate of value for the company as of a valuation date nearly three years prior to the date of the engagement. Additionally, we performed damage calculations based on profit sharing arrangements between the company and the third-party administrator.

Because the company had been operating with full-time commitment from its staff for only a short period of time prior to the valuation date, we considered the company and its associated product to be a start-up in the early stages of its life cycle. Consequently, in estimating the value of the company, we relied exclusively on the income approach, since utilizing other methods would be inappropriate. Accordingly, we followed a valuation framework for young, start-up, and high-growth companies that varied from that of more mature businesses. This framework required us to determine a potential market for the company’s product, the market share of the company, and operating expenses and margins of the company using several industry and academic data sources.

Result

After being engaged, we had only one week to complete a deliverable report for the case. In addition to this time constraint, we had little historical information on which to base our analysis due to the start-up nature of the subject company. Despite these challenges, we completed the valuation estimate and damage calculations in time to be submitted to the court. We were later subjected to an all-day deposition where we defended our report and analysis. The case was ultimately settled out of court, which was a desirable outcome for our client.

This document is for informational use only and may be outdated and/or no longer applicable. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Capital Advisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.