One reason businesses opt to resolve their disputes through arbitration instead of the federal or state courts is that the arbitration decision usually cannot be overturned, unless the arbitrator has committed misconduct or exceeded his or her powers. The possibility of an irrational award, however, has caused some arbitration agreements to include an additional term called a de novo review clause, which allows a court to set aside an arbitration award for errors of fact or law.

The problem is that Pennsylvania state and federal court rulings disagree on the question of whether these de novo review clauses are enforceable. A Pennsylvania federal appellate court says parties can agree to have their awards reviewed de novo, whereas a Pennsylvania state appellate court has ruled that de novo review clauses are unenforceable under Pennsylvania law.

The difference of opinion between the Pennsylvania state and federal courts mirrors the split that exists among the federal circuit courts over whether de novo review clauses are enforceable. The U.S. Supreme Court is expected to decide the issue in the upcoming term. Until it does, businesses that want the option of expanding judicial review in arbitration agreements need to put a number of very specific and complicated clauses into their arbitration agreements. A company cannot wait until a dispute arises to learn whether it will receive the greater review of an irrational arbitration award.

-- Ronald L. Hicks Jr.,
Meyer Unkovic & Scott,
rlh@muslaw.com

Every business owner should know what the company is worth. Having an inaccurate idea of what a business is worth can be devastating. For example, overestimating the value could lead to borrowing more money than the business can afford to. And for business owners who intend to fund their retirements from the sales of the businesses, an inaccurate valuation can be disastrous.

Despite the fact that companies have been valuing their worth since the dawn of the market economy, a large number of businesses still fall into some common pitfalls that lead to inaccurate values for the business:

1. Failure to account for all business assets including intangible assets.

2. Inappropriate application of multiples to a business that is clearly performing above or below industry averages. Multiples are industrywide rules of thumb for the worth of a business.

3. Forgetting that the existence of minority shareholders inherently reduces the value of a business.

4. Failure to reflect unique, nonrecurring events like unusual income or costs for a given year.

5. Failure to adjust for risk factors, such as overdependence on a small number of key customers or over-reliance on key individuals such as the owner.

Perhaps the worst mistake to make is to use theory to determine the value of a business instead of trying to answer one simple real-world question: What would the business be worth today on the open market?

-- Alex Kindler,
Horovitz, Rudoy & Roteman,
akindler@hrrcpa.com