Peterson v. Jackson, 2011 WL 14519606 (Utah App.)(April 14, 2011)
When three shareholders in a CPA firm couldn’t agree on a buyout price for a departing partner, they sought judicial dissolution and appraisal under the applicable statutory scheme (Utah). At trial, the partnership’s expert used the market, income, and asset approaches to reach a range of value from $581,000 to $713,000 for the entire firm, but then rejected all but the asset approach to value the shareholder’s 37.6% interest at just over $224,000.
In contrast, the departing shareholder’s expert assigned zero weight to the asset approach and under a combined capitalization of cash flow and market approach, reached a total value in excess of $1.26 million. After adding a pro-rata portion of undistributed cash and declining to deduct the value of personal goodwill (due to a non-compete), he valued the departing shareholder’s interest at $505,000. The trial court also heard evidence that one of the partners had bought into the practice in 2001 at a multiple of 90% of gross sales—which, when applied to the departing partner’s shares, would have yielded a value of nearly $518,000.
Given the more than 50% difference between the two sides, the trial court was tempted to take a “Solomon approach and split the difference.” Rather than “picking a number out of thin air,” however, the court credited the departing shareholder’s expert, including his opinion on goodwill, and criticized the firm’s expert for relying solely on the asset approach without any evidence of liquidation. He also valued the company in the hands of a specific owner rather than a “fair value concept in which the ownership interest is valued as if it were placed on the open market for sale,” the trial court said. Using the 2001 buy-in price as an additional “guidepost,” it found the firm’s fair value was $1.26 million, excluding any undistributed cash, yielding roughly $459,000 for the departing partner.
On appeal, the appellate court confirmed that the departing partner’s expert provided the more reliable estimate of value while the company’s expert “strayed from the clear guidance” of fair value precedent. The trial court was also correct to exclude any personal goodwill from its valuation, the appellate court said, with emphasis, because the non-compete effectively “converted personal goodwill, if any, to enterprise goodwill.” Finally, although the departing partner’s expert reduced the cash in his income approach to avoid double-counting an award of the undistributed cash reserves, he did not offer an alternate calculation of value that included reserves—which were substantial ($138,000) but not clearly outside of the firm’s historic practice. The trial court’s unwillingness to recalculate the expert’s income approach “was not error,” the appellate court found, and affirmed its fair value determination in all respects.
