“It’s better to be lucky than good,” Gary Trugman told the BVWire™, with characteristic modesty, concerning his role in Lemmen v. Lemmen (Mich. App., Feb. 9. 2010). He was referring to this language in the Michigan Court of Appeals decision: “Trugman is perhaps THE most qualified and respected business evaluator in that profession” (quoting from the divorce trial in which Gary Trugman appeared as a rebuttal expert). “Trugman literally wrote the book on business valuation,” the Court continued.
The husband owned a minority (25%) interest in an oil and gas holding company, which his expert valued using the build-up method and a discount rate derived from Ibbotson data, applying it to the company’s projected dividend stream. During deposition, the wife’s attorney questioned the expert’s methodology, and asked who was a top authority in the field. When the expert cited Trugman, the wife brought him in as rebuttal expert. At trial, Trugman testified that the proper method would have been to apply the Ibbotson-derived discount rate to net cash flow and not to “estimated actual dividends at the shareholder level.”
May not be the final word. The trial court accepted Trugman’s testimony (with its memorable plaudits) along with evidence from the wife’s primary expert, who valued the husband’s 25% interest at $17.5 million. However, the trial court also applied minority and marketability discounts, based on the same expert’s valuation of a co-owner’s 25% interest four years before the divorce. A single but strong dissent claimed the discounts contradicted equitable principles, given the company’s substantial liquid resources (combined cash and retained earnings of over $67 million) and the differences between factors surrounding the earlier valuation. Moreover, the dissent advocated adopting the statutory fair value standard in divorce, based on case law from other jurisdictions. The parties obviously have sufficient resources and a precedent-setting issue to appeal to the Michigan Supreme Court—which, as Trugman notes, would concern just the application of discounts and not the discount rate, “which is a lock.” Stay tuned…
In the meantime, look for the complete case digest of Lemmen v. Lemmen in the April Business Valuation Update™; the full-text of the appellate court opinion will be available soon at BVLaw™.
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