The Taylor’s owned and operated a pharmacy located within a hospital for nearly twenty years of their marriage. Upon filing for divorce, each spouse retained experts to value the business.
While both experts agreed that a capitalization of earnings method could best value the business, they disagreed on certain data and assumptions.
The husband’s expert relied on only two years of earnings to value the pharmacy at $211,000. Wife’s expert relied on five years of earnings, which he opined was the “typical number of years used for business valuation.” Wife’s expert also used a hire capitalization rate than husband’s expert. His determination was based on his opinion the hire cap rate was appropriate due to three specific risk factors:
1. Husband had become disabled, leaving the wife as the “key” person to run the business;
2. Pharmacy’s contract with the hospital had a termination clause; and
3. There was a relatively short term remaining on the contract.
Wife’s expert applied a 20% discount for lack of marketability (DLOM) because of the costs and difficulty in finding a buyer for the business. His opinion was that the business value was $107,350.00.
The trial court accepted wife’s expert evaluation holding that it most appropriately reflected the fair market of the business, based on the traditional court ruling “buyer/willing seller” definition. Thereafter, husband appealed. Husband claimed that “his expert was correct in his valuation of the business and that the wife’s expert was wrong,” in response to which the appellate court held that the credibility of expert testimony is within discretion of the trial court. The appellate court thereafter affirmed the $107,350 value for the pharmacy. Taylor v. Taylor 2012 N.C.APP. (March 6, 2012).
Forbes Magazine outlines the process here