Trial court bungles valuation of key marital asset

BVWireIssue #168-3
September 28, 2016

If the takeaway from last week’s profiled case is that courts have a hard time trusting expert valuations, a recent Mississippi divorce ruling sends the opposite message: It takes an expert to value even a small family business.

Court plays appraiser: The couple’s dispute revolved around a fitness training company the husband had set up before the marriage, but which the court classified as marital property because of the wife’s contribution to building the business. The company was comprised of the husband, his car to get to client sites, and a few pieces of transportable equipment. Income fluctuated from year to year.

At trial, there were scant financial data and no expert testimony. The trial court decided the income approach was the only viable method to value the company. The valuation was complex, it said; and, to “properly value the company … the Court would need a valuation expert to review the historic earnings, and after adjusting the income to reflect normalized earnings, multiply the normalized earnings by a capitalization factor.” However, the court did not appoint an expert or even ask for further financial evidence. Instead, the court based the entire valuation on the company’s profit and loss statement for one year, subtracting liabilities from income and the value of the business’s few assets.

Not good enough: On appeal, the husband successfully opposed the valuation. The appeals court noted the parties’ failure to provide valuation evidence. It also said the trial court “did the best [it] could with the information available.” However, in terms of ensuring an equitable distribution, the company was too important an asset for the trial court simply to wing it. The appeals court expressed concern over the fluctuating income and the likelihood that the income was “intertwined” with the husband’s goodwill. It remanded for an “adequate valuation.” The trial court had the authority to appoint an independent valuation expert should the parties fail to offer a valuation or expert testimony, the appeals court pointed out.

The case is Lacoste v. Lacoste, 2016 Miss. App. LEXIS 460 (July 19, 2016). A case digest and the court’s opinion are available at BVLaw.

Extra: BVR’s “Charting Goodwill Jurisprudence” (January 2016) provides a state-by-state breakdown of goodwill jurisprudence and is available here.

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