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Divorce Court Rejects DLOM on Husband’s Dental Practice

A discount for lack of marketability (DLOM) can dramatically reduce a business’s value, in turn reducing the amount a spouse receives in a divorce case. But the likelihood of a business’s sale may determine whether such a discount is even appropriate. In a recent divorce action, Barnes v. Barnes, the court of appeals found that a DLOM on the husband’s dental practice was improper because he had no need or desire to sell his interest.

Multiple valuation methods

The husband in the case owned a dental practice consisting of himself, an associate dentist and several employees. In 2003, the husband was offered $913,000 for the practice. In 2006, he signed a net worth statement valuing the practice at $1 million. The annual net revenue of the corporation between 2005 and 2009 ranged from $1.48 to $1.74 million.

At trial, the wife’s expert used three different methods to value the practice:

1. Summation of assets,
2. Gross revenue multiplier, and
3. Capitalization of earnings.

The wife’s expert reached a value of $678,179. But the husband’s expert calculated the value at only $50,000, using an income-based approach (the capitalized cash flow method). Among other steps, the husband’s expert applied a 15% DLOM. The trial court also employed an income-based valuation approach, ultimately estimating the dental practice at $328,392. This included a 15% DLOM of $57,951.

DLOM struck down

On appeal, the wife argued that the trial court had erred in applying the DLOM to the practice. The court of appeals agreed. It found that the trial court’s valuation shouldn’t have been affected by the lack of marketability of the husband’s interest in the absence of any indication that a sale of his interest was necessary or desirable.

Because the husband had no intention of selling his interest, a lack of marketability had no effect on the value of the business. Therefore, the appellate court added $57,951 back to the practice value and awarded the wife another $28,976.

Battle of the experts

Although the wife ultimately prevailed, it’s worth noting that the trial court gave greater weight to the valuation of the husband’s expert because the valuation considered the practice’s debts and accounts receivable. The husband’s expert also had more extensive industry data to support the valuation, and this data, the trial court said, was benchmarked better than the data of the wife’s expert. Make sure your experts’ opinions can withstand such judicial scrutiny.

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