As it turns out, size really doesn’t matter, especially when it comes to applying a discount for lack of control to a minority interest in a closely held corporation. A recent Ohio Court of Appeals decision found that the Trial Court did not err in choosing the valuation developed by the wife’s expert, which did not apply a discount for lack of control to ownership interests of 1.73% and 1.27% in two related companies.
The husband was employed by Company A and Company B as chief-salesperson, president, and CEO, often working 60 or more hours a week. He received a base salary, as well as yearly bonuses based on profitability plus a fee for serving on the Board of Directors and an allocation of the income or loss from these companies, which were both S corporations. The husband received 1 share of stock in each company as a gift from the original majority shareholder.
For their divorce, the wife’s expert valued her husband’s combined ownership in both companies at $83,000 to $117,000, which included just a 10% discount for lack of marketability. The husband’s expert, however, determined that his combined ownership interest was worth only $11,387, through the application of a 24.3% discount for lack of control and a 15% discount for lack of marketability. He argued that a liquidation value could not be used because the husband couldn’t force a liquidation and that a discount for lack of control was warranted because of the small block of stock owned.
Both courts sided with the wife finding that the husband was not just a figurehead but the key driving force behind the company’s success. Furthermore, the husband had not been compelled to sign a noncompete agreement with the company. In other words, it cannot be ignored that the majority shareholder(s) must consider the significant influence of control that the husband exerted in the business. Therefore, a lack of control discount was not necessary.
So as you see, size really doesn’t matter as much as the weight of your argument. If you have a potential valuation issue, please give me a call. We actually like doing this.
Mike Stover, CPA/ABV