Opinion ID: 901366
Heading Depth: 1
Heading Rank: 6

Heading: Failure to Use the Buy Back Formula to Determine Value

Text: [¶ 13.] The parties also dispute the value of the third business, NCHI Holdings. The operating agreement of this company contains a buy-sell provision, which requires the Company to buy out an owner that wants to sell his/her interest. This provision provides that the purchase price shall be determined by multiplying the book value of the company's assets, less liabilities and undistributed profits, times the member's sharing ratio. Mark claims the value of the company under the formula provided is $1,457,675. Mark's sharing ratio is 5.128205%. Therefore, under the formula, the amount that Mark would receive if his shares were sold back to the company would be $74,753. This was the valuation amount provided by Mark's expert. Zelmira's expert, however, concluded that Mark would likely receive the amount of his original capital contribution because the amount under the formula in the operating agreement was less than his capital contribution. His capital contribution was $93,256, and Zelmira's expert set that figure as the fair market value of Mark's interest. The expert's report explains this decision as follows: Use of the original capital contribution is based on a discussion with Kathy Haberling, administrator at NCHI, who indicated that an existing owner-physician would likely be paid no less than their original contribution. [2] He further explained this in his testimony at trial by saying: I believe it is only common sense when a new doctor comes in today, they will have to put in as a contribution as a minimum what the original founding doctors put in and thus for [Haberling] to conclude that they would likely pay out that original contribution even if the book value computation was less, to me was only common sense. He also stated that a buy-sell agreement clearly is not designed to represent fair market value; because if the entire business was sold  not just one individual's interest  the buy-sell formula would not apply. [¶ 14.] Given Wenande's explanations, we cannot say the trial court's adoption of his valuation was clearly erroneous. Although the agreement provided for a specific buy back price if Mark would choose to sell, the expert based his opinion on the hospital administrator's belief that Mark most likely would be paid his original capital contribution. In addition, the buy back provision would not apply in the event of a total sale of the business by all owners. Therefore, the valuation adopted by the trial court for Mark's business interest in NCHI Holdings was not clearly erroneous.