Offer to Buy 'Nixed' on Appeal
Nix v. Nix; 2023 Ind. App. Unpub. LEXIS 183; 2023 WL 2148720
For as long as I can remember, there has been the question of using an offer to buy a subject company to determine the value. The short answer is not normally. Sometimes, an offer can be used to support value, but it will likely not be the primary value determinant. Remember that, in determining a fair market value (FMV) of a business enterprise, you must consider a hypothetical willing buyer and a hypothetical willing seller.
The first problem that arises is that an offer to buy or sell requires acceptance by both parties in order to have a sale. I have been in cases before where the opposing side will use an unaccepted offer to buy (usually, or sometimes to sell) as “proof” of the FMV of a subject company. However if neither side does not accept the offer, there is no transaction.
A recent case provides a clear indication of the problem with using an offer. In Nix v. Nix,1 an Indiana divorce case, the wife owned a business that was marital property. The husband’s expert determined the value of the business to be $992,100, while the wife’s expert valued the business at $470,000. By themselves, those two values are still wide apart, but the real hook came from testimony from the couple’s daughter. The parties’ adult daughter testified that, on June 17, 2017, she offered to buy NXE (the wife’s business) for $4.25 million. The husband introduced the unsigned purchase agreement. The daughter testified that the wife did not take the offer seriously and “laughed at her.” The trial court valued the business at $4.15 million “"due to the offer to purchase at or near the date of filing" and awarded the business to the wife.
Fortunately, the appeals court was not buying it. Citing several prior Indiana cases (two of which yours truly testified in), the appellate court reversed the $4.25 million valuation and remanded with instructions for the trial court to “assign a value to NXE within the range of values put forth by Husband and Wife, namely, between $470,000 and $992,100, which is the only competent evidence of the business's value.”
The $4.25 million “offer” was so bizarre and out of the range of reliability that it is hard to see how the trial court could have used it as a value. But it did, and that is one reason we have appellate courts. Sanity has been returned to the process.
1 2023 Ind. App. Unpub. LEXIS 183; 2023 WL 2148720.