Value of Closely Held Corporation Increased in Dissolution Proceeding
In re Martin, No. 14-0568, 2015 Iowa App. LEXIS 110 (Iowa Ct. App. Feb. 11, 2015)
The Iowa Court of Appeals recently weighed in on the important issue of valuing a closely held family corporation in a dissolution proceeding. Calling such valuations an “inherently difficult endeavor,” the court landed on a 20 percent marketability discount and increased the equalization payment the husband was to pay the wife.
In this case, the husband owned a one-third share of his family’s successful machine and fabrication business. He earned around $300,000 each year working for the business, which employed more than one hundred workers.
The district court had valued the husband’s one-third share of the business at $367,053 based upon testimony presented by the husband of a 2010 valuation from an expert business valuator. The company sought this valuation at the time the sons bought their parents’ share of the business. This was just before the filing of the dissolution. The wife received a $243,559 equalization payment in light of the husband retaining his shares in the company. The district court relied upon the husband’s valuation because the company’s stock redemption agreement stated that shares must be valued using the same methods and principles applied in the company’s prior valuation.
The wife appealed, arguing primarily that she was entitled to a greater equalization payment because the business was worth much more than the amount set by the district court.
On appeal, the court reiterated the general rule in a dissolution case that stock should be value at market value if it can reasonably be ascertained. With a closely held corporation, however, such a valuation is difficult. Thus, the court stated that “the intrinsic value of such a business may be determined by using a broad range of evidence, including the corporation’s assets, liabilities, dividends paid, the character and permanency of the business, the control of the stock, the management structure, the market for articles produced, and other facts. “
The husband’s expert had valued the husband’s share of the corporation at $367,053 in 2010. He had reached this figure after discounting the equity value by 24.2 percent to account for a lack of marketability, 17 percent to account for the minority interest, and nine percent to account for nonvoting shares. The district court had relied upon this figure in reaching its decision.
The wife had hired a certified public accountant to perform an appraisal of the business. The wife’s expert, who conducted his last valuation in 2012, asserted that the husband’s stock was worth $1.2 million. The wife’s expert applied only a 20 percent marketability discount to the shares. Of this amount, $356,072 was attributed to a 2009 gift of nonvoting shares from this parents that were not included in the marital estate. Thus, the wife’s expert set the relevant value of the husband’s shares at $841,505.
The Court of Appeals disagreed with the district court’s adoption of the 2010 valuation. It first found that it was illogical to accept the business valuation simply because family members agreed to use it for the completely separate purpose of selling shares back to the company.
The court also found that the wife’s expert’s valuation was a more accurate estimate of the value of the husband’s shares in the business. He used the same accounting principles, but more up-to-date information, including the fact that 20,000 outstanding corporate shares had been redeemed. The court found that the wife’s expert also did not apply “multiple discounts that would undervalue the stock held by [the husband] and his siblings.”
With no further analysis, the court found that the value of the marital estate should be increased by $474,452 in light of the increased valuation. Accordingly, the court modified the equalization payment from $243,559 to $457,994.
The appellate decision amounted to a good day for the wife. It was, on the other hand, rather ho-hum for Iowa attorneys seeking further clarity on how courts will value closely-held family corporations in dissolution and other proceedings. In this case, the expert with the most up-to-date information prevailed. A 20 percent marketability discount was applied, but the court established no new guiding principles.
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