Choosing the right Business Valuation expert can yield exponentially different outcomes
by Michael Stover, CPA/ABV
Sometimes nobody believes the expert’s opinion, not even their client. A recent decision in Ohio’s Fifth District Appeals Court affirmed the lower court’s decision in a domestic relations case concerning the value of the husband’s interests in two family-owned agri-businesses. The court’s finding, for the wife, was more than six times the value purported by the husband’s expert.
At issue was a 24.5% member interest in an LLC that owned farmland and a 25% partnership interest that operated the farm and owned the equipment and other assets. The agreements between the husband and his family included buy-out provisions in the event someone wanted out. The buy-out value for the partnership excluded more than $2 million of grain inventory because it was needed to cover the operating expenses for the coming year. The husband’s expert valued his interests at $730,200… while the wife’s expert valued the interests at $4,589,000.
The wife’s expert used the net asset approach to determine the value and reviewed the agreements and meeting minutes, financial statements, tax returns and real estate appraisals. He also performed a site visit, conducted interviews, and read several articles and publications. He interpreted the buy-out provision to mean “the value today of what these assets and liabilities are worth.” He also did not exclude the value of the grain inventory since it represented a current asset with value.
The Husband’s Expert
The husband’s expert settled on the capitalized excess earnings method to determine her value. She used historical financial information and tax returns, reviewed portions of the agreements and meeting minutes, and also read several articles and publications. Book values represent historic cost, not the current values, and she, inexplicably, did not review the complete real estate appraiser’s opinion. Because her calculation was derived from book values, she considered USDA reported land values “to reach an average of land value for land in Ohio.” She did this by assuming one-third of the acreage was farm real estate, one-third was cropland, and one-third was pasture. Furthermore, she applied a 20% discount for lack of control, even though the agreements specifically excluded discounts in the buy-out provision.
The members’ meeting minutes, attached to the 2015 financial statements, indicated the “true value” of the land equaled $17,110,000, with a net equity of $15,792,500. One member explained that they personally computed the land values because they were “very much aware of what real estate is selling for in the area.” The husband himself agreed the real estate appraiser was “probably in the ballpark” as to the land value.
The court found the husband’s expert’s report unpersuasive and unsupportable. The husband did not sell his interest at the valuation date but continued on an ongoing basis to participate in the operation. Instead, it found the buy-out provisions were nebulous, and the wife’s expert’s report credible and in line with the current value of the assets as stated by the members. It was the court’s opinion that the value of the interests in the companies was $4,589,000.
The right expert will not simply give you the number that you want, but give you an understanding of what drives the number.
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