Non Expert ValuationsLacoste v. Lacoste, 2016 Miss. App. LEXIS 460 (July 19, 2016) 

A recent Mississippi divorce case highlights the complexity of valuing a small family business as well as the importance of an accurate valuation to achieving an equitable distribution of marital assets. Neither party in the case retained an expert, prompting the trial court to make its own value determination. The appeals court appreciated the trial court’s dilemma but found it could not let the resulting valuation stand.

The couple’s dispute revolved around a fitness training company the husband solely owned and operated. The business was the couple’s main asset and source of income. Other than a car the husband used to travel to client sites and a few pieces of transportable equipment, the company had no assets. Profit fluctuated from year to year. Because the wife contributed substantially to building the company, the trial court classified it as marital property.

The parties provided scant financial evidence and did not offer expert testimony. The trial court found the income approach was the only viable method to value the company. Even though the court recognized it “would need a valuation expert to review the historic earnings, and after adjusting the income to reflect normalized earnings, multiply the normalized earnings by a capitalization factor,” it did not appoint an expert or require further evidence.

Instead, the court based the entire valuation on the profit/loss statement for one year by “consider[ing] the income and assets of the company balanced with the debts and liabilities of the company.”

On appeal, the husband attacked the valuation for failing to determine the business’s future income stream and for including personal goodwill in the valuation.

At the outset, the state Court of Appeals noted that the husband “failed to suggest a valuation or present any testimony or other evidence on valuation.” But even allowing for the parties’ neglectful behavior, the appeals court agreed with the husband that the trial court’s valuation was untenable.

The business valuation was “such an important aspect of the [trial court’s] ruling that further testimony was essential to establish a proper valuation to divide the marital property fairly and correctly,” the appeals court said. The trial court’s decision to base the valuation on one year’s financial statement when the income fluctuated drastically from year to year was unjustifiable. Further, the company’s income seemed “intertwined with goodwill.” The appeals court was not confident that the trial court’s valuation excluded goodwill, as state law required.

Consequently, the appeals court remanded, noting the trial court had the authority to appoint an independent valuation expert should the parties fail to offer a valuation or expert testimony.