Olsen v. Olsen, 19981
| Decision Date | 04 April 1994 |
| Docket Number | No. 19981,19981 |
| Citation | 125 Idaho 603,873 P.2d 857 |
| Parties | Thomas E. OLSEN, Plaintiff-Respondent, v. Carol L. OLSEN, Defendant-Appellant. |
| Court | Idaho Supreme Court |
Schroeder & Lezamiz Law Office, Boise, for plaintiff-respondent. John T. Schroeder, argued.
Cantrill, Skinner, Sullivan & King, Boise, for defendant-appellant. Gardner W. Skinner, Jr., argued.
This is a divorce case. The issue presented on appeal concerns the valuation of interests in closely held corporations owned by the parties as community property. We conclude that the trial court used inappropriate rates to capitalize excess earnings and to discount for marketability in determining the value of the marital interests in the closely held corporations.
THE BACKGROUND AND PRIOR PROCEEDINGS.
Thomas Olsen and Carol Olsen were married from 1967 until their divorce in 1989. The property to be valued at the time of their divorce included their interests in Olsen Livestock Consultants, Inc. (OLC), GMO Livestock Products, Inc. (GMO), and Nutri-Plus, Inc. (Nutri-Plus). The Olsens owned all of OLC, one-third of GMO, and one-half of Nutri-Plus. Mr. Olsen's education and work experiences were in animal nutrition. He used this background in developing the business of these corporations, and planned to retain the interests and continue working with the corporations after the divorce. At a trial before the magistrate judge (the trial court), each party submitted expert opinion concerning the valuation of the Olsens' interests in the corporations.
Mr. Olsen's expert focused on determining the fair market value of the corporations assuming an exchange between a willing buyer and a willing seller as reflected by the corporations' tangible assets. Mrs. Olsen's expert underscored the going concern nature of the corporations, emphasizing that when a going concern is valued primary emphasis is placed on earnings, rather than tangible assets, to ascertain the good will of the business.
Mr. Olsen's expert valued the corporations by computing the excess earnings of each corporation, applying a capitalized earnings value formula to the excess earnings, and then discounting the product of the capitalized earnings value for marketability. Mr. Olsen's expert then weighted this result and the fixed asset value of the corporations to arrive at the value of the corporations.
Mrs. Olsen's expert valued GMO and Nutri-Plus by calculating the excess earnings of the corporations and then applying three different formulas, the multiple earnings formula, the present value cash flow formula, and the capitalized excess earnings formula, averaging the values ascertained by each formula. In Valuing OCL, Mrs. Olsen's expert used the same average excess earnings that Mr. Olsen's expert used, but used a different capitalization rate and discount rate for marketability than Mr. Olsen's expert used. Also, Mrs. Olsen's expert did not weight this result and the fixed asset value in arriving at a value for OLC.
Each expert acknowledged that the capitalized earnings method was an appropriate method to ascertain the value of the corporations. Mr. Olsen's expert acknowledged that the "capitalized earnings approach would be appropriate," and Mrs. Olsen's expert admitted that he "used the capitalized earnings method to evaluate the value of" the corporations. In applying the capitalized earnings formula, each expert also applied a market discount to the value of the corporations to reflect the lack of market transferability of the corporations due to risky stock salability and "key man" risks.
In its decision, the trial court rejected the approaches taken by the experts of both parties. The trial court stated that the valuation of Mr. Olsen's expert overemphasized "key man" and "marketability" factors. The trial court rejected the valuation of Mrs. Olsen's expert, because, in the trial court's opinion, it was based on values to Mr. Olsen after the divorce, rather than on values to a willing buyer.
The trial court determined the values of the corporate interests by applying the capitalization rate of Mr. Olsen's expert to excess average earnings of the corporation for what the trial court found were the most representative years. The excess average earnings equals the business' income less its expenses. Expenses include an appropriate salary, the amount necessary to enable the corporation to employ someone to replace Mr. Olsen. The trial court then multiplied the excess average earnings by the capitalization rate used by Mr. Olsen's expert to obtain a present dollar value of the business' future income stream, called the capitalized excess earnings value. Finally, the trial court applied the market discount employed by Mr. Olsen's expert to the capitalized excess earnings value for lack of marketability, but refused to weigh the net asset value and capitalized value factors in the same manner as Mr. Olsen's expert, which would have resulted in a further downward adjustment of the value of the business.
Mrs. Olsen appealed to the district judge, who affirmed the trial court. Mrs. Olsen then appealed to this Court.
THE TRIAL COURT USED INAPPROPRIATE RATES TO CAPITALIZE EXCESS EARNINGS AND TO DISCOUNT FOR MARKETABILITY IN DETERMINING THE VALUE OF THE MARITAL INTEREST IN THE CLOSELY HELD CORPORATIONS.
In her opening brief, Mrs. Olsen states the issue in this appeal to be:
Whether the trial court should have used a "going concern" approach rather than a "fair market value" approach in valuing the closely held corporations involved in this action.
We find a more tightly focused statement of this issue in her following argument:
The proper measure of the value of the corporations owned by the Olsens is not the price (if any) that could be obtained in a sale to a third party. The proper measure is, rather, the "value to [Mr. Olsen]" who "enjoys the benefits of the good will."
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