Opinion ID: 1162581
Heading Depth: 2
Heading Rank: 1

Heading: valuation of the business

Text: The major asset of the parties is a one-half interest in Quality Asphalt Paving, Inc. The trial court valued this interest at one million dollars, and did not allow a minority discount. [7] The husband was awarded all of the stock in Quality Asphalt, and was required to pay the wife $500,000 over a ten year period, payable at $4,375 per month. A minimum of 5% of the remaining principal must be paid each year. Interest on the unpaid balance is ten and one-half percent. The appellant (husband) contends that the trial court's valuation of the business was clearly erroneous. Only two witnesses expressed an opinion as to the value of the business. The husband opined that it was worth between $625,000 and $650,000. An expert appraiser, Dahe Good, hired by the husband with the concurrence of the wife, expressed her view that the business was worth $850,000. The trial court stated in supplemental findings that it reached the million dollar valuation based on the amount of life insurance purchased by each stockholder to allow the surviving stockholder to purchase the interest of the deceased stockholder. The trial court found that the amount of insurance each purchased was one million dollars. This is an inadequate basis for valuing the business. Neither shareholder has any particular incentive to agree to the actual value of the business in an insurance funded buy-out agreement. [8] Further, there was no evidence as to when the agreement was made, and the only mention of the agreement we have found in the record on appeal is the testimony of the husband who was uncertain as to whether the agreement was for one million or for one million five hundred thousand dollars worth of life insurance. The wife defends the trial court's finding on a different basis. She argues that the court could have employed the capitalization of net earnings method, mentioned but almost entirely rejected by Good, and could also have declined to utilize any minority discount. Good's report sets out two valuation methodologies, capitalization of net earnings and net worth of tangible assets. Using the capitalization of net earnings method, the Hayes' interest was calculated to be worth $1,085,000; after applying the 15% minority discount employed by Good, their interest was $922,250. Under the tangible net asset method, the Hayes' interest figures at $995,346; after the discount is applied, their interest is $846,044. Good concluded that $850,000 was the fair market value. She declined to give significant weight to the capitalization of net earnings method due to present declining market conditions, characterizing the method as subjective in the present case because of the lack of data to back up the selection of the 3.5 multiplier which she picked. No one, other than Good, testified as to which valuation method was preferable. The trial court therefore would have had no evidentiary basis for selecting the method which Good had rejected. With respect to the utilization of a minority discount, Good determined that a 15% discount was appropriate. Another witness called by the husband, Joseph Whitlock, expressed the view that a discount in the range of 20-40% should have been employed. A third witness, Theodore Sherwin, called by the wife, testified that no minority discount was appropriate in a divorce settlement context because generally there is no change of ownership. We reject Sherwin's view as a matter of law. The concept of value is keyed to the price that a prospective buyer would pay. Moffitt v. Moffitt, 749 P.2d 343, 347 (Alaska 1988). Sherwin's testimony runs counter to this concept. We also note that courts in many jurisdictions have recognized that a minority discount is frequently appropriate in divorce proceedings. See Arneson v. Arneson, 120 Wis.2d 236, 355 N.W.2d 16, 22 (App. 1984) (not clearly erroneous for trial court to apply minority discount); In re Marriage of Jorgensen, 180 Mont. 294, 590 P.2d 606, 610 (1979) (not an abuse of discretion to apply minority discount); In re Marriage of Belt, 65 Or. App. 606, 672 P.2d 1205, 1207-08 (1983) (trial court's valuation modified to include minority discount where the only credible evidence produced at trial favored discount); In re Marriage of Reiling, 66 Or. App. 284, 673 P.2d 1360, 1364, 1365 (1983) (same); In re Marriage of Hoak, 364 N.W.2d 185, 192-93 (Iowa 1985) (not error to apply minority discount, but discount allowed by the trial court was too large and must be reduced); Bowen v. Bowen, 96 N.J. 36, 473 A.2d 73, 76-77, 81 (1984) (trial court should appoint independent expert to advise it in deciding whether to apply minority discount). Based on the foregoing, we conclude that the trial court's determination that the Hayes' interest in Quality Asphalt was worth $1,000,000.00 is clearly erroneous.