A joint expert valued the husband’s 33% interest in a successful grocery store/ S corporation at $557,000, based on net assets and including 20% marketability and minority discounts. At the 2007 trial, the wife’s attorney questioned the expert about a just-released decision from the Massachusetts Supreme Judicial Court, Bernier v. Bernier, which also concerned a closely held grocery store/ S Corp (and which has since become familiar to most appraisers for its holdings on tax-affecting as well as discounts; see BVWire #60-3). Valuation professionals were still “wrestling” with Bernier, the expert conceded, but in light of its holding, he testified that discounts were no longer applicable, and adjusted his valuation to roughly $870,000. With leave from the court, the husband presented a rebuttal expert, who criticized the asset approach for improperly equating the net book value of an ongoing business to fair market value, and used the “more appropriate” income approach to value the business at $534,000, without discounts.
The trial court adopted the $870,000 value by the joint expert and the husband appealed—but he couldn’t persuade the appellate court, which found that Bernier clearly bars discounts, except in “extraordinary” circumstances (liquidation or imminent sale). Moreover, “while the income approach has emerged as the dominant approach in business valuation, the weight of authority does not support…that it is the only appropriate measure of [the store’s] value or that the use of any other methodology is clearly erroneous,” the court held, citing Pratt & Niculita, The Lawyer’s Business Valuation Handbook, (2d ed. 2010). Notably, the decision does not discuss tax-affecting, leaving appraisers and attorneys to keep wrestling with the issue. The complete digest of Palmerino v. Palmerino, 2011 WL 1450359 (Mass. App.Ct.)(April 15, 2011) will appear in the July 2011 BVUpdate; the court’s unpublished opinion will be posted soon at BVLaw.
Keep current on divorce case law. These decisions illustrate why it’s so important for appraisers to know, understand, and apply the most recent court decisions to business values in divorce. To do just that, consider BVR’s comprehensive, just-updated Divorce Case Law Compendium.
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