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Valuing Franchises in Divorce Cases Is a Matter of Discretion

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

A review of the cases shows that the standard methods for calculating the value of assets do not always control the methodology used in divorce valuations.

Three cases illustrate the variety of definitions and the general assertions that value in divorce proceedings is not necessarily a mathematical construct as much as it is a matter of the discretion of the court.

Courts may or may not be bound by accepted definitions of ?fair value? for appraisal rights (and allowing for no discount factors) or ?fair market value,? which provides for discounts for lack of marketability and illiquidity and supposes a transaction between a hypothetical willing buyer and willing seller.

In Alexander v. Alexander (Ind. App. Ct., May 20, 2010), one of the marital assets that needed to be valued was a Century 21 franchise. The competing valuations were described by the court:

The business appraisals disagreed in several areas, best summarized as follows: (1) Strauch eliminated all of the interest expenses incurred by the corporation, and Stover found the expenses to be legitimate expenses (2) Strauch increased the cash flow of the business, and Stover used the actual Federal Income Tax Returns filed by the parties to reflect the expenses and income of the business.

One expert ascribed a value of $288,600 to the franchise, while the other came in at $35,800. Not surprisingly, the court effectively cut the baby in half and arrived at a value of $119,475. More importantly, the court discussed and accepted (although modified) certain discounts to the valuation?basically adopting the mechanics of a ?fair market value? analysis.

In contrast, the court?in the case of In re Marriage of Thornhill (Colo. S. Ct., June 1, 2010)?was called upon to adopt ?fair value? for appraisal rights as the standard for valuation of closely held businesses for divorce proceedings and expressly declined to do so.

Experts for both the wife and the husband had provided valuations that initially were within $18,000 of each other, at approximately $2.5 million. However, significant disparity in the final valuations resulted from the application of a 33 percent marketability discount by the husband?s expert, while the wife?s expert applied no marketability discount, citing the rationale of the court?s in a decision with respect to appraisal rights. (Pueblo Bankcorporation v. Lindoe, Inc., 63 P.3d 353, Colo. 2003)

But the appellate court declined to accept any required mechanism as a matter of law, stating that, by statute, the proper method of determining value was within the ?discretion? of the trial court.

The third case that should be noted is Brown v. Brown(792 A.2d 463, N.J. Super. Ct. App. 2002), where a New Jersey appellate court did extend a rule prohibiting the use of marketability discounts in shareholder dispute cases to divorce proceedings?effectively adopting ?fair value? for appraisal rights as the appropriate valuation standard for New Jersey divorces.

This case was expressly rejected by the court in In re Marriage of Thornhill. In fact,most courts have left the decision as to the applicability of marketability discounts in valuations within divorce proceedings to the trial court?s discretion. (See Erp, 976 So. 2d. at 1239; Fausch v. Fausch, 697 N.W.2d 748; and Matter of Marriage of Tofte, 895 P.2d 1387)

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Additional information on the issues discussed above is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

Full post as published by Trade Regulation Talk on September 30, 2010 (boomark / email).