A recent Minnesota case illustrates how multiple sides in a lawsuit can come to widely varying estimates of the value of a business. In Lund v. Lund, 27-CV-14-20058, Hennepin County, Minnesota, the plaintiff had tried for nearly twenty years to obtain a buyout order for her 25% interest in the Lund businesses. Lund included a chain of upscale grocery stores, a real estate holding company and a management company. Kim Lund was one of four grandchildren who each inherited a 25% interest in the family business.
Kim Lund filed suit against her brother Tres and the Lund Companies in 2014 to get the court to order a buyout. Tres was the only family member still active in the business. The court ordered a buyout in October 2016, but still had to arrive at a value for Kim’s interest. Valuation experts on all sides provided their estimates of the value of the company and Kim’s 25% share. The valuation experts used both income and market approaches in their calculations.
Determining the “Prevailing Party”
The plaintiff’s valuator, influenced primarily by national trends, came up with a very optimistic view of the companies’ value, arriving at a total of $321.6 million, with $76 million for the plaintiff’s share. Meanwhile, the defense undervalued the companies, taking into account estate tax and pension fund liabilities. This reduced the cash flow value, resulting in an estimate of total value at $91.3 million, or $21.3 million for the plaintiff. The defense valuator, anticipating an unfair transfer of wealth to the plaintiff, also applied a 10% DLOM (Discount for Lack Of Marketability), but the court disallowed it saying that there was no evidence that the plaintiff would receive a higher price than market value. The court said the plaintiff should not be penalized because her siblings didn’t want her to be bought out.
The judge, unsatisfied with both valuations, decided to do her own valuation. The final valuation established the fair value of the three Lund companies at $191.5 million. The plaintiff would receive $45.2 million of that value. Kim Lund would be free to sell her share in the companies.
There Are Three Ways to Determine Business Value
Business valuators use one of the three following methods to value a business and the shares of owners:
- Income approach – focuses on the cash flow and the net present value of expected future profits. In a going concern, this is often the preferred approach.
- Market approach – compares the value of a business to other businesses in the marketplace. While commonly used, this approach sometimes faces challenges in finding businesses that the parties and the court will find similar enough for comparison.
- Asset approach – assumes the sale and liquidation of all assets, including established goodwill. For a successfully operating business, this would not be the preferred approach.
You want to look at the income approach primarily. Courts will look to the income approach more than the market approach because of the attributes the income provides. When facing a potential buyout or other change in business ownership, you need a qualified business valuator to protect your interests. TD&T can provide that kind of assistance for you and your company.