A while ago, an expert who spoke at a continuing education event for attorneys described valuation as an “iterative process.” Experts have to rework valuations as a case develops and new facts emerge to achieve the most accurate appraisal possible in a given situation, she said. She is right. Not knowing all of the relevant facts puts an expert in a vulnerable position, as a recent Louisiana divorce case shows.
Unaware of key fact: The parties contested the value of the wife’s interest in a home healthcare company that was organized as an S corporation. The wife and two partners formed the company during the marriage. She owned a 47.2% interest; a silent partner, who provided financial backing, also held a 47.2% interest; and a third partner owned the remaining 5.6%. The LLC agreement included transfer restrictions.
The trial court’s appointed expert valued the business at nearly $70,000 under an income approach. He applied a 40% discount “due to the limited marketability of a minority interest.” The husband’s expert gave equal weight to the results of an income analysis and a market analysis and concluded the value of the wife’s interest was $911,000.
On cross-examination, both experts displayed gaps in their knowledge of key facts. The husband’s expert, in particular, was unaware that there were restrictions on the sale and transfer of company stock but admitted that such restrictions would decrease the value of a company and that she had applied discounts to account for a lack of marketability and control in other cases. An industry expert for the wife testified he had never sold a minority interest in a home health company or even had anyone inquire about buying such an interest “due to lack of control with a minority interest.”
The trial court adopted the $70,000 valuation, finding the wife’s valuation and industry experts displayed a greater understanding of the company and the industry in which it operated. The appeals court, commenting on the weaknesses of both valuation opinions, upheld the lower court’s decision. It noted that the wife’s two partners were not trying to buy her out, “and, therefore, any third party purchaser would be subject to lack of control.”
Takeaway: Experts have to stay on top of the facts as they develop. This may mean prodding the retaining attorney for updates and additional documents as well as insisting on an opportunity to speak with the owners and managers of the business.
The case, Vedros v. Vedros, 2017 La. App. LEXIS 2027 (Oct. 25, 2017), raises a host of other value-related issues. A digest and the court’s opinion will be available soon at BVLaw.