Business Valuation: the 5 Most Costly Legal Mistakes (& How To Avoid Them)

Valuing a business is not a purely financial exercise; above all, it is an act with legal consequences. The figure stated in a valuation report may determine the reimbursement payable to a departing shareholder, the price of a sale transaction, the taxable base for tax purposes or the distribution of assets in an inheritance.

For that reason, the most costly mistakes are rarely found in the spreadsheet itself, but rather in the legal framework surrounding that figure. These are the five legal mistakes that most frequently destroy—or give away—value when valuing a company in Spain, and how to protect yourself against them.

The first, and most important, point is that there is no single “value” of a company, but as many values as there are legal contexts. The book value shown on the balance sheet, the “fair value” required by law to reimburse a shareholder and the market value at which a sale transaction is completed are different concepts, calculated using different methods and producing different legal effects.

Before putting a number on the table, a legal question must be answered: what is the purpose of the valuation, and under which legal standard is it being performed? Everything else depends on that answer. Confusing these standards is the source of most shareholder disputes and unexpected tax assessments.

In a freely negotiated sale, the price is whatever the parties agree. However, in many situations the law removes that freedom and requires a specific standard: fair value.

Article 353 of the Spanish Companies Act (Ley de Sociedades de Capital – LSC) provides that, when a shareholder withdraws from or is excluded from a company and there is no agreement on the value of their shares or equity interests, they must be valued at their fair value, as determined by an independent expert appointed by the Mercantile Registrar of the company’s registered office.

Spanish case law has consistently equated this fair value with the real or market value: the amount at which the shares would presumably be transferred between two independent and well-informed parties. For listed companies, the law itself establishes the criterion: the average market price during the previous quarter.

This standard is triggered more often than many people realise. The right of withdrawal due to the failure to distribute dividends, regulated by Article 348 bis LSC—in its current wording following Royal Decree-Law 7/2021—allows a shareholder to withdraw from the company, unless the articles of association provide otherwise, once five financial years have elapsed since the company’s registration with the Mercantile Registry, provided that the company has generated profits in the previous three financial years and the shareholders’ meeting has not approved the distribution of at least 25% of the legally distributable profits of the preceding year, with the shareholder having formally recorded in the minutes their objection to the insufficiency of the dividend distribution.

When this occurs, the company becomes obliged to reimburse the shareholder at the fair value of their interest, regardless of whether the timing is convenient for the company. The mistake is to plan a succession, the exit of a shareholder or the resolution of an internal dispute based on a negotiated “price” when the law requires a value determined by an independent third party.

Many business owners equate the value of their company with its accounting net equity. This is a twofold mistake.

First, because the balance sheet records the historical cost of assets rather than their economic value, and it rarely reflects the intangible assets that sustain the business: the brand, customer base, goodwill, team, or expectations of future profitability.

Second, because neither the law nor valuation experts accept nominal value or book value as an appropriate measure of the fair value of a going concern.

Legally robust valuation methods include discounted cash flow analysis, comparable company multiples and adjusted net asset value.

Indeed, courts and court-appointed experts tend to favour a multi-method approach, with a reasoned weighting among different methodologies and appropriate upward and downward adjustments, rather than relying on a party-appointed valuation report based on a single criterion.

Basing a negotiation, shareholder exit or inheritance on book value is equivalent either to giving up a substantial portion of the company’s real value from the outset or exposing oneself to the risk that an independent expert will determine a significantly different figure.

A rigorous valuation is not only about what a company is worth, but also about what it may be hiding.

Unrecorded contingencies—ongoing litigation, penalties, guarantees, personal sureties, regulatory breaches or latent claims—reduce value and, more importantly, may ultimately be transferred to the buyer.

From an employment law perspective, Article 44 of the Workers’ Statute imposes business succession rules and joint liability on the new owner for employment and Social Security obligations arising before the transfer.

From a tax perspective, Article 42 of the General Tax Law extends joint liability to any person succeeding to the ownership or operation of a business or economic activity, although such exposure can be limited by requesting in advance the tax debt certificate provided for by the General Tax Law.

The mistake is to value and complete a transaction without first conducting legal, tax and employment due diligence, and without incorporating its findings into the price and transaction documents.

The legal tools exist: representations and warranties (reps & warranties), purchase price adjustment clauses, escrow arrangements and, where appropriate, earn-out mechanisms linking part of the purchase price to future performance.

A valuation that is not translated into these contractual protections is only half a valuation.

Before calculating what a company is worth, it is worth reading its “internal law”.

The articles of association and shareholders’ agreement often contain restrictions affecting what may be transferred, to whom and at what price: restrictions on transferability, pre-emption rights, drag-along and tag-along rights, ancillary obligations, or even agreed valuation formulas capable of displacing the default legal regime within the limits permitted by law.

In family-owned businesses, the family protocol adds a further layer of rules governing the entry, exit and valuation of shareholdings.

This is also where the statutory deadlock mechanism comes into play. If the shareholder and the company cannot agree on the value, the identity of the valuer or the valuation procedure, Article 353 LSC refers the matter to an independent expert appointed by the Mercantile Registrar, who must issue a report within a maximum period of two months from appointment (Article 354 LSC).

Carrying out a valuation without regard to this framework—ignoring a provision in the articles of association or assuming that value can be determined solely by the seller—is often the first step towards litigation and corporate deadlock.

The final mistake is treating a valuation as a document whose relevance ends when the transaction is signed.

The tax authorities always have the final word.

In transactions between related parties, Article 18 of the Corporate Income Tax Act requires valuations to be carried out at market value, and the Spanish Tax Agency may initiate a valuation review under Articles 57 and 134 et seq. of the General Tax Law, with the resulting risk of additional tax assessments and penalties.

Every transfer also carries its own tax consequences: capital gains taxation under Personal Income Tax or Corporate Income Tax, Transfer Tax or Stamp Duty, and, in the case of gratuitous transfers, Inheritance and Gift Tax.

The best defence against these risks is documentation.

A report clearly setting out the methodology, assumptions and adjustments used is what allows the valuation to withstand administrative review and potential judicial challenge.

Valuing a company without anticipating the tax implications and without leaving a robust technical record turns a sound transaction into a future liability.

These five lessons can be summarised in a single principle: a valuation is designed before it is calculated.

The first step is to define the purpose of the valuation and the applicable valuation standard. Next comes the use of multiple methodologies with reasoned weighting, followed by legal, tax and employment due diligence to uncover contingencies, a review of the articles of association and shareholders’ agreement to understand the rules of the game, and the preparation of a properly documented report that anticipates the tax dimension of the transaction.

Above all, a corporate lawyer, tax adviser and valuation expert should be involved from the outset, because each of these five mistakes stems precisely from looking at only one piece of the puzzle.

What is the “fair value” of a company under Spanish law?

It is the valuation standard imposed by Article 353 of the Spanish Companies Act when a shareholder withdraws from or is excluded from a company and there is no agreement on price. Spanish case law equates it with the real or market value: the amount at which the shares would be transferred between two independent and well-informed parties. It does not correspond to nominal value or book value.

Who values the shares if the shareholders cannot agree?

If there is no agreement on the value, on who should perform the valuation or on the valuation procedure, the shares are valued by an independent expert appointed by the Mercantile Registrar of the company’s registered office, at the request of the company or any affected shareholder. That expert determines the reimbursement value and must issue a report within a maximum of two months from appointment.

Is book value useful when selling my company?

As an initial reference point, yes. As a measure of real value, no. Book value reflects historical cost and excludes intangible assets such as the brand, customer base and future profit expectations. For a sale transaction or shareholder exit, discounted cash flow analysis, comparable company multiples and adjusted net asset value are generally the preferred methods.

Can the Spanish Tax Agency challenge the value of my company?

Yes. In related-party transactions, the law requires valuations to be carried out at market value, and the tax authorities may initiate a valuation review that could result in an additional tax assessment and penalties. A well-documented valuation report, setting out its methodology and assumptions, is the best defence against such scrutiny.

At ILIA ETL GLOBAL, we approach business valuation for what it truly is: a legal, tax and financial decision all at once.

We advise SMEs, family-owned businesses and middle-market companies on corporate transactions, mergers and acquisitions (M&A), due diligence processes, and the design of shareholders’ agreements and articles of association, bringing together corporate lawyers, tax advisers and valuation specialists under one roof.

If you are considering selling your business, bringing in a new shareholder, planning a generational transition or simply finding out what your company is really worth before someone else decides for you, let’s talk.

A well-structured valuation is not an expense; it is the difference between completing a successful transaction and inheriting a future liability.