Opinion ID: 901366
Heading Depth: 1
Heading Rank: 5

Heading: Lack of Marketability Discount

Text: [¶ 7.] Both parties provided expert testimony as to the value of Mark's business interests. In valuing NCH Real Estate and Medical Development, the experts arrived at significantly different figures. A major part of the disparity between the values of the two experts was the application of a 25% marketability discount on the part of Mark's expert, Shelly Fossum, in comparison to 0% marketability discount used by Zelmira's expert, John Wenande. The trial court adopted the value of Zelmira's expert and did not apply a marketability discount. The reason for accepting the opinion of Zelmira's expert was explained in the trial court's decision as follows: The valuation given to the property by defendant's expert Mr. Wenande made the most sense. Mr. Wenande based his opinion on a $3.00 per square foot valuation. This value was based on the fact that the entity had sold land to the Heart Hospital for $3.00 a foot in 1999, in 2002 had donated 4 acres to a charity and allocated $200,000 per acre or over $4.00 a square foot on its tax return, and had recently accepted an offer of $2.75 a square foot for some of the land. Mr. Wenande also testified that a 10% discount for lack of control should be given, but an additional 25% discount for lack of marketability was inappropriate in a divorce case where no sale is contemplated. ... Adjusting Mr. Wenande's numbers to take the taxes into account, I find Dr. Fausch's interest in NCH Real Estate LLC is worth $154,400. Medical Development is an entity that owns land held for development. Accepting Mr. Wenande's values for the reasons stated above, I find Dr. Fausch's interest to be $175,000. [¶ 8.] Mark argues that it was error for the court not to apply a marketability discount. Although acknowledging that a marketability discount may not always be appropriate, Mark claims that rejecting one in this case was error because of the underlying premise of Wenande's opinion. Wenande opined that it was not appropriate to apply the discount in a divorce case if the business was not going to be sold. [1] Mark argues that since the task of the expert is to determine and provide the fair market value of the business, an expert's opinion must establish the price at which a willing seller would sell to a willing buyer. If the price involves a discount for lack of marketability, Mark claims that the discount should be factored into the property valuation regardless of whether a sale of his interest is or is not intended. [¶ 9.] We have acknowledged that fair market value is the price a willing buyer would pay a willing seller, both under no obligation to act. First Western Bank Wall v. Olsen, 2001 SD 16, ¶17, 621 NW2d 611, 617. We have also approved of applying a marketability discount in a divorce case where no immediate sale is contemplated. See Priebe, 1996 SD at ¶19, 556 NW2d at 83 (affirming the application of a 40% lack of marketability discount in a divorce case). We stated in Priebe that the determination of whether to apply a minority discount depends upon the evidence presented in each case. In other words, this is an issue that must be dealt with by trial courts on a case-by-case basis. Id. ¶17, 556 NW2d at 82. The relevant evidence in this context is whether a willing buyer would actually require a minority discount and to what degree. [¶ 10.] In this case, the trial court found: A 10% discount of lack of control should be given, but an additional 25% discount of lack of marketability is inappropriate in a divorce case where no sale is contemplated. If the trial court intended this as a legal conclusion applicable to all divorce cases, it is in err. We have not adopted a bright line rule prohibiting marketability discounting in a divorce case where a sale is not contemplated. Whether or not it is fair or appropriate to apply a marketability discount in a divorce case where no immediate sale is contemplated is for the trial court to determine based upon the evidence of the case. Id. See also Hayes v. Hayes, 756 P2d 298, 300 (Alaska 1988) (where a witness testified that no minority discount was appropriate in a divorce settlement context because generally there is no change of ownership, the Alaska court rejected this view as a matter of law); Kalisch v. Kalisch, 585 NYS2d 476, 479 (NYAppDiv 1992) (abrogated on other grounds by, McSparron v. McSparron, 662 NE2d 745 (NY 1995)) (modifying a trial court's determination of the value of a husband's interest in a closely-held corporation because the trial court improperly failed to discount the value of the company to reflect the lack of marketability of its stock); Bryan v. Bryan, 382 NW2d 603, 606 (Neb 1986) (providing that a trial court may consider, among other things, the marketability of the shares when determining the fair market value of a business); Matter of Marriage of Tofte, 895 P2d 1387, 1392 (OrCtApp 1995) (finding that it was proper to apply a minority discount regardless of whether husband intended to sell). [¶ 11.] Nonetheless, since we review a trial court's valuation under a clearly erroneous standard, we must determine, in this instance, if the failure to apply a marketability discount to Mark's interest was error. We have said that the fair market value is the price a willing buyer would pay a willing seller, both under no obligation to act. First Western Bank Wall, 2001 SD at ¶17, 621 NW2d at 617. Here, the experts disagreed. Mark's expert testified that any potential buyer of Mark's interests in the two businesses would demand a discounted price due to the minority status of the interests. She determined that a 25% discount would be appropriate. Zelmira's expert testified primarily as to his opinion that a minority discount was inappropriate or unfair in these situations. He also provided testimony as to what, if any, discount a willing buyer would require. He stated: [I]f you did look at marketability discount, I would look at the number of people who are most likely willing and waiting to buy those interests, that being the other physicians who have money and reason to acquire interest in these properties. He further explained that there were no restrictions on who may purchase the interests in the two businesses and that anyone could offer to buy them subject only to the entity's right of first refusal. He finally stated: It would be an attractive investment and I would fully expect the doctors themselves would not want that to go outside of their group. [¶ 12.] This testimony effectively rebuts the proposed application of a discount. Consequently, there was evidence before the trial court that a sale of Mark's interest may not be subject to a minority discount. We cannot say that the court's decision not to apply a discount is clearly erroneous. See Christians v. Christians, 2001 SD 142, ¶12, 637 NW2d 337, 380 (Although a trial court is not required to accept either party's proposed valuation, the value must be within the range of evidence presented to the court.).