Court’s discount rates don’t overvalue business interests

Halliday v. Halliday, 2012 Tenn. App. LEXIS 856 (Dec. 6, 2012)

The husband held varying interests in six companies that owned real estate. At divorce, he and the wife presented expert testimony about the value of the businesses and his interest in each. Both experts used the net asset method, but disagreed on the appropriateness and percentage of discounts for lack of control (DLOC) and lack of marketability (DLOM).

The husband’s expert explained that, generally, the DLOC recognized that a minority interest was worth less "than a proportionate share of the value of the total entity" and applied to partnerships in which a "partner did not enjoy the full rights of ownership." A DLOM dealt with how quickly an owner could turn his interest into cash "if [he] chooses to sell," the expert said.

He reviewed case law that addressed discounts, "various factors" (unspecified) that related to the husband’s business interests, and a study from a national business valuation firm. He found that a 36.1 percent DLOM was appropriate for five of the six entities.

The wife’s expert said that the DLOC measured "the decremental effect on an equity investment’s pro rata value" when an owner did not have complete control over "the entity’s financial operation and legal decisions." It was contingent on the size of the interest and whether there were "multiple types of ownership." He believed applying a DLOM was inappropriate "if the business is not for sale." This was the situation for all businesses here, he concluded.

The experts and the trial court made the following valuations:

  1. The husband’s expert valued his 100 percent interest in a subchapter S corporation at $430,000, to which he applied a 36.1 percent DLOM to arrive at $275,500. The wife’s expert determined his interest was nearly $680,000, using no DLOM. Both agreed that a DLOC was not appropriate given the husband’s complete ownership.

    The trial court valued the business at $560,000, with no discount.
  2. The husband owned a 50 percent interest in a general partnership that his expert valued at $4.2 million. Applying a 35 percent DLOC and 36.1 percent DLOM, he calculated a $880,000 value for the husband’s interest. The wife’s expert agreed to the total value, but found the husband’s interest was $1.9 million, applying an 8.46 percent DLOC.

    The court valued the husband’s interest at $1.8 million, using a 15 percent DLOC, but no DLOM.
  3. The husband also held a 50 percent interest in a limited liability corporation, which his expert valued at over $3.1 million. Applying a 35 percent DLOC and 36.1 percent DLOM, he determined his interest was worth $640,000. The wife’s expert agreed to the value of the company, but applied only an 8.46 percent DLOC and found the husband’s interest totaled $1.4 million.

    The court valued the husband’s interest at $1.3 million, using a 15 percent DLOC.
  4. Moreover, the husband held a 17.5 percent interest in a partnership whose asset was a 16-acre tract of undeveloped land near a highway connector. His expert valued the company at $400,000 and the husband’s interest at $28,000, applying a 37.7 percent DLOC and a 36.1 percent DLOM. Her expert determined the husband’s interest was worth $61,500, applying a 12.2 percent DLOC.

    The court adopted the specified value of the real property, $400,000, and valued his interest at over $70,000. With a 20 percent DLOC and a 10 percent DLOM, it arrived at a total value of $50,000.
  5. The husband owned a 33.33 percent interest in a company his expert valued at $565,000; applying a 37.7 percent DLOC and a 36.1 percent DLOM, he determined the husband’s interest was $75,000. The wife’s expert valued the company at $620,000. Applying an 11.48 percent DLOC, he concluded the husband’s interest was worth $183,000.

    The court, using a 15 percent DLOC and 10 percent DLOM, determined the husband’s interest was $144.000.
  6. The husband’s expert valued his 50 percent interest in a sixth business at negative $83,000, but the wife’s expert calculated it was worth $52,000. Neither applied discounts.

    The court found the business in general had a negative value, and the husband’s “negative value [was] $83,000."
Undersized discounts, oversized alimony award?

The trial court then used the calculated values to determine a $1.1 million alimony in solido award for the wife, which the husband contested in the Tennessee Court of Appeals. It resulted from the lower court’s overvaluation of his business interests, he argued. The court should have applied larger discounts.

The appellate court affirmed the valuations with little discussion. It noted that the trial court applied a DLOC where the husband did not have a 100 percent interest in the company and a DLOM as "appropriate." The lower court’s amounts of discounts fell within the range of the experts’ testimonies.