In this Arkansas Court case, the various attempts to determine values for two related family-owned businesses led to widely divergent results.  Even from the same valuation analyst.

Farrell v. Farrell, 2013 Ark. App. LEXIS 33 (Jan. 23, 2013)
The wife appealed the trial court’s decision to assign all interest in the family businesses to the husband, which, she claimed, left her with a shortfall of $4.4 million.
The husband owned a 19.4% interest in two sets of closely held family businesses. The first entity included mining and land companies; the second was called the “Texas ventures.” At trial, the husband requested that the wife receive one-half of all business interests. However, she asked the court to value the companies and award money instead. Both parties presented experts to provide valuations.

As to the first entity, the wife’s expert stated that the value of a coal mine lay in its reserves—the coal in the ground—and that the value of the particular company was $13.2 million. He did not value the Texas ventures, but the wife’s CPA determined they were worth $3.2 million.

The husband provided several valuations for the first business, including one from the company’s controller that stated book value (not specified). One of the experts cautioned that any valuation had to account for the costs of extracting the coal as well as bonding and permitting. (Further details not provided.)

The husband’s CPA initially stated the Texas entities were worth $1.6 million but revised his opinion after talking with the wife’s CPA. Subsequently, he assigned a negative value of $536,000.

The trial court initially issued a letter opinion stating it had considered the various valuations but noted some had deficiencies and limitations “too numerous for a lengthy discussion.” The statute referred to “fair market value,” the court said. But this standard was of no consequence, since the business was a closely held family corporation and the shares were not for sale. The issue was the value long term to the owners or to someone who would buy the entire operation. As to the mining business, the court credited the wife’s expert’s valuation but applied a 25% discount “for mining costs and contingencies.” It determined a total value of $10.2 million. Adding this amount to the remainder of the valued estate, it found the total marital assets were worth $11.2 million and each party’s share was $5.6 million.

Among the court’s reasons for not making the wife a minority shareholder was its concern that she or her representative would impede business operations. Therefore, it awarded all the shares to the husband, along with the accompanying corporate debt, and the rest of the marital estate, valued at $979,000, to the wife. Because the court recognized that this resulted in an “uneven division” of assets in the husband’s favor, it also ordered the husband to pay the wife $10,000 per month for life in alimony. These payments would make the division equal.

The trial court did not incorporate its letter opinion in its subsequent divorce decree. Although it agreed with the wife that there had to be valuations for all assets, it did not expressly value the Texas ventures. In assessing the mining business, it again adopted the valuation of the wife’s expert. However, it lowered the value to $9.9 million, noting it had considered the business-related debt. At the same time, it reduced the wife’s share of the marital estate to $964,000.

The wife asked the court to reconsider its unequal division. She requested that it place a value on the Texas businesses. She also stated that, even if their value were zero, the marital estate would still be worth about $11 million. As it stood, her award was only 9.7% of the assets. To remedy the shortfall, the court should increase the monthly alimony payments to $33,000 or order the husband to pay a $4.4 million lump sum.

After the trial court denied the motion, she appealed, making ostensibly the same arguments. The husband contended that the trial court in fact had valued the Texas entity. It had lumped all the values into its calculation and incorrectly attributed the supporting evidence to the wife’s expert, whose $13.2 million valuation referred only to the mining business.

The Court of Appeals agreed with the wife that the lower court’s decision was problematic. The opinion left it unclear whether the trial court meant to include the Texas entities in the valuation it adopted. Although the court’s value for the first business was within the range of expert testimony, the law required it to state expressly the value of the property. And although the court explained its decision to award all business interests to the husband in its letter opinion, it failed to incorporate the latter in the official divorce decree. This failure was in violation of the statute. On remand, the lower court also might reconsider its alimony award, the appellate court noted.