In the 8th post in my Statutory Fair Value and Business Valuation Series, we focus on the case Verghetta v. Lawlor. We consider five valuation issues this case raises: reasonableness of valuation conclusions, reasonableness of normalization adjustments, reasonableness of projections, whether the earnings of tax pass-through entities should be tax-effected, and appropriateness of a marketability discount.
We continue our discussion of statutory fair value with an outline of the discounted cash flow (DCF) model (or method). The DCF valuation method is a core method within the Income Approach to Value (with the other two approaches being the Asset Approach and the Market Approach). One objective of this series of posts on statutory fair value is to outline sufficient valuation and finance theory so we can begin to examine cases, i.e., judicial interpretations of what fair value means. With the proper background, we will be able to understand and to interpret what the courts have said in the context of valuation theory.
If fair value in a jurisdiction is the proportionate interest in a going concern, it could either be at the strategic control level or the financial control level. However, because of the prohibition of the use of minority interest discounts, appraisers and courts need to develop a common vocabulary that will enable both to develop realistic indications of statutory fair value.
Peter Mahler reported this week on a recent New Jersey appellate level case focusing on the application of a 25% marketability discount in a statutory fair value determination in his New York Business Divorce blog. The New Jersey Appellate Division issued an unpublished decision in Wisniewski v Walsh, 2015 N.J. Super. Unpub. LEXIS 3001 [App. Div. Dec. 24, 2015]. The case is interesting in that it attempts to determine a marketability discount in relationship to the “bad behavior” of a selling shareholder. Given the timeliness of the case, I’ll interrupt the background posts on statutory fair value for a week and look at this New Jersey case.
In the initial post in this series on statutory fair value, we introduced the ideas that fair value is, in part, an equitable concept, and that appraisers are not in a position to make “equitable” decisions.
Appraisers cannot decide matters of equity, but we can provide good and clear valuation evidence to courts in statutory fair value matters. In this post, we will address what appraisers call “levels of value.” Courts are generally familiar with some of the concepts, but I do not believe that most courts are familiar with the growing understanding of the levels of value concept in the appraisal profession. This lack of understanding creates confusion and increases the difficulty of presenting valuation evidence in statutory fair value proceedings.
This is the first in a series of posts on the topic of Statutory Fair Value and Business Valuation. In this post, we examine the concept of statutory fair value, especially as it is defined in the state of Delaware as well as the difference between the concepts of “fair value” and “fair market value.”