Mobile Homes Co. Valued | Marketability Discount Discounted

Tennessee business valuation law case summary. Tennessee divorce and family law from the Tennessee Court of Appeals.

Anderson v. Anderson, No. E2005-02110-COA-R3-CV (Tenn. App. Sept. 5, 2006). Tennessee Business Valuation Law: Mobile Homes

In granting Thomas and Dimple Mae Anderson’s divorce, the trial court in Monroe County made valuations on the marital property. Mrs. Anderson disagreed those valuations, specifically in regard to the value on the Mr. Anderson’s stock in a closely held corporation.  A hearing was held on the value of his interest in Monroe County Mobile Homes, Inc.

Douglas Warren, a CPA was hired by the Anderson’s to establish the value of the stock.

Warren was and had been the CPA for the corporation since the 1970s.  He testified the company had been valued on two earlier occasions:  at the death of a shareholder and when another shareholder wanted to make a gift.  The CPA testified that he also reviewed the current five-year financial history of the company by looking at the tax returns and annual financial statements.  He used this information to analyze the value in accordance with IRS Revenue Ruling 59-60, which states that an analysis should include the market value, the asset value, and the income value.  In addition, Warren testified to the following:

• Mr. Anderson owned 43.75% of the company’s stock, and that to get the value of his interest, he took the “fair value” of the entire company, which was $1,518,000, and calculated 43.75% of that value;
• The fair value was based on one buyer purchasing the entire corporation, whereas fair market value would only consider selling the minority interest.  Warren considered the each of these factors:  (i) the nature of the business; (ii) its history; (iii) the economic status of the industry; and (iv) the nation’s economy at the date of the valuation.  He testified that the company was declining in value, because the mobile home industry had declined in recent years due to a drop in the economy, and also a lack of financing options;
• The asset value had gone down 16-18% or by about $500,000 in the last four years as a result of low sales, citing lower interest rates which allowed people who would have bought mobile homes to buy regular homes. Warren stated that if interest rates increased, sales could also increase;
• Warren arrived at an initial value of $2.7 million by averaging the value reached by using the three methods (market value, asset value, and earnings value or capitalization of earnings method), and discounted the value by 38.3%, because Mr. Anderson owned a minority interest, so he could not actually control the company and salaries, dividends, cash flow, etc. He reduced the value to $1.6 million, and testified that the 38.3% was a comparison of actual sales versus fair value;
• He reduced that value by 10% for a marketability discount—the cost of marketing and selling Mr. Anderson’s stock (advertising, broker fees, etc.), and as such, the fair market value would be $665,000.00.  On cross-examination, Warren admitted that if the entire company sold, the husband’s value would be approximately $1.2 million.

The trial court decided that Warren properly applied the standards set forth in the Revenue Ruling, and adopted the expert’s value of the interest at $664,300.00.

The court of appeals said that are a number of acceptable methods for determining the value of a corporation, but that a public corporation’s value is most reliably determined using the market value method.  The market value method presumes that there is an established market for the corporation’s stock which will enable the court to arrive at the price that a willing buyer would pay for the stock.  In addition, stock in closely held corporations rarely is traded, so the court of appeals believed it improper to attempt to place a value of a closely held corporation using the method generally used to place a value on a public corporation.

Mr. Anderson’s position on appeal was that the value adopted by the trial court was within the range of evidence submitted, and the evaluation should be affirmed.  However, the court of appeals found that the only evidence on the valuation was by the Andersons’ joint expert.  The court of appeals disagreed with Warren’s averaging of three different valuation methods results and the discount for costs associated with a sale of the company.  Although determining the value of a closely held corporation is not “an exact science,” the court of appeals said, there has not been any consistency as to how to value this marital asset.  Nonetheless, Revenue Ruling 59-60, 1959-1 C.B. 237 was recognized as the most comprehensive guide to making this determination; according to the appellate court, it was only a guide, not an inflexible rule.  This ruling provides nine factors to be considered when determining a closely held corporation’s value.  Those factors are:

(1) the nature of the business, including its history since organization,

(2) the economic status of the industry and the nation at the critical date of valuation,

(3) book value,

(4) earnings,

(5) dividends and dividend paying capacity,

(6) the existence or lack of good will or other intangible value,

(7) sales of the stock and the size of the block to be valued,

(8) the selling price of comparable securities relative to their earnings, dividends and asset values,

(9) the life insurance proceeds received by a corporate beneficiary on a policy covering the sole or controlling stockholder.

The court of appeals noted that Warren’s initial valuation method considered those factors, and went on to discount this valuation.  However, the CPA reduced the value by an additional 10% for a “marketability discount.”  The court of appeals thought Warren’s arguments persuasive, but concluded that the added discount was inappropriate as no sale was ordered, nor was there any indication in the record that Mr. Anderson planned to sell the stock.

The 10% reduction was $168,714.00, and when this discount was removed, the value of the Mr. Anderson’s stock interest was $742,343.00.  The court of appeals ruled that the trial court’s finding of value should be increased to that amount—$78,043.00, but affirmed the trial court’s decision with the modification.

See original opinion for exact language.  Legal citations omitted.

To learn more about Tennessee business valuation law, see Business Valuation in Tennessee Divorce Law.  To learn more about the division and valuation of professional practices in divorce, see When Professionals Divorce in Tennessee: Valuing Professional Practices.

Miles Mason, Sr. JD, CPA handles complex divorce matters including business valuations and forensic accounting issues.  View his professional biography listing books and articles published on business valuation and forensic accounting, seminars presented to lawyers, judges, business valuation experts, and forensic accountants. Miles Mason, Sr. authored The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association.The Miles Mason Family Law Group, PLC’s offices are located in Memphis, Tennessee and serves West Tennessee and Nashville, Tennessee.