A summary of recent cases on statutory fair value shows state courts still grappling with the application of marketability and minority discounts, company-specific risk, and shareholder tax consequences, especially in the appraisal of small, family-owned companies.
Kentucky identifies ‘modern trend’ on discounts. In Brooks v. Brooks Furniture Mfgrs, 2010 WL 4290068 (Ky. App.)(Oct. 29, 2010), the father effectively “squeezed out” his son from owning the family furniture company. At trial, his appraiser used the net asset method to value the company, discounted by 30% for certain companywide risk factors, including working capital requirements and liquidation costs. The son’s appraiser also applied the net asset method but believed discounts were inappropriate. The trial court adopted the company’s appraisal but reduced the discount to 20% (essentially splitting the difference between the parties), and the son appealed. Read More...
Divorce Roundup: Goodwill, Taxes, and Effect of Economy
Five recent divorce cases show courts still focusing on issues of private practice professional goodwill, the effect of taxes and non-compete agreements; and how to value smaller businesses during the current economy.
Georgia adopts majority rule. In Miller v. Miller, 2010 WL 4704326 (Ga.)(Nov. 22, 2010), the wife’s business valuation expert applied the asset, market, and income approaches to value the husband’s internal medical practice at just over $330,00. The trial court adopted this value and the husband obtained an expedited appeal to the state Supreme Court.
The court confirmed the expert’s application of the market and excess earnings approach in this case. It also found that the capitalization of earnings approach did not improperly include the husband’s future earnings, when the expert:1) made appropriate modifications for S corporation taxation; 2) excluded any professional goodwill; 3) deducted a reasonable compensation for the professional’s services; and 4) capitalized actual past earnings instead of estimated future earnings. Accordingly, no “double-dipping” occurred in this case, the court held. Read More...
Divorce Courts Reject ‘Calculation Values’ Offered by BV Experts
During these tough economic times, parties and their attorneys may often request a business appraiser to perform a preliminary “calculation valuation” for settlement purposes. Although the majority of cases do settle, these two recent cases highlight problems of presenting anything less than a complete valuation in court.
In re Marriage of Hagar, 2010 WL 4807559 (Iowa App.)(Nov. 24, 2010). The husband and wife owned three dry cleaning stores, which they bought from his parents for $300,000 with a promissory note. Over the marriage, they paid down the note to nearly $121,000, but when the relationship deteriorated, the husband defaulted and his mother threatened forfeiture, so the wife borrowed money to pay the arrears. At trial, the court faulted the husband for wanting to “ruin the parties’ financial picture,” and valued the business at $95,000, or the midpoint in a range of $71,000 to $120,000 provided by the family’s longtime CPA. Read More...
Current Market Conditions Testing the Limits of Bankruptcy Courts and Law
In the wake of the recent economic crisis, bankruptcy courts have taken on large, complex cases, made even more complicated by continuing uncertainty in the credit and liquidity markets. Adding to the pressure, expedited settlements are creating unique valuation issues that are, as one court put it, “testing the limits of bankruptcy law.”
Limits to using unencumbered assets to pay off secured lenders. In In re Capmark Financial Group, 2010 WL 4313046 (Bkrtcy. D. Del.)(Nov. 1, 2010), the debtor proposed to cash out a $1.5 billion secured loan in exchange for the lenders’ release of the collateral, valued at $1.3 billion to $1.5 billion. The committee of unsecured creditors objected, claiming the pre-confirmation payment of the secured claim with cash violated the limits permitted by the Bankruptcy Code. Read More...
Choice of Reliable Growth Rate Is Key to Calculating Business Interruption Loss
Manpower, Inc. v. Insurance Co. of Pennsylvania, 2010 WL 3730968 (E.D. Wisc.)(Sept. 20,
2010)
When its office building partially collapsed, the plaintiff shut down for 14 months until it could relocate. In a suit against its insurance company for business-interruption losses, the plaintiff’s damages expert asserted over $7.5 million in lost profits and expenses. The defendant attacked the expert’s calculations as unreliable under Daubert. Read More...
