NY fair value ruling deals blow to DLOM
La Verghetta v. Lawlor, Index No. 5934/2014, N.Y. Sup. Ct. [County of Westchester] (March 9, 2016)
A recent statutory fair value ruling from a New York trial court is must read for appraisers. The case featured experts whose professional backgrounds and valuation approaches could hardly be more dissimilar. Their value determinations were light-years apart. In trying to make sense of the conflicting testimony and achieve a plausible and fair result, the court decided it could not totally trust either valuation. Although it adopted the defense expert's valuation, it made two consequential changes to it. One was getting rid of the expert's admittedly high and insufficiently explained discount for lack of marketability.
The case revolved around two entities that served as holding companies for Planet Fitness franchises. The owners were three partners who roughly owned equal interests. The companies' function was to manage the existing health clubs in New York and to develop new ones in New York and California pursuant to development agreements with the franchisor. The contracts favored the franchisor. They included strict requirements as to the number of clubs the franchisees had to open per year and severely limited what the franchisees could do to generate income.
When the partners fell out, the plaintiff minority shareholder sued the defendants and initially asked for the dissolution of the enterprise. The parties subsequently agreed to a fair value determination of the two companies by the court to enable a buyout of the plaintiff's interest.
The plaintiff’s expert was a tax lawyer with no formal valuation training or certification, whereas the defendants’ expert was one of the founding fathers of the valuation profession. The former valued the two corporations at over $162 million and the plaintiff’s interest at over $53 million. The latter determined one of the entities was worth over $6.2 million and the other $208,000. Accordingly, the plaintiff’s one-third interest was worth approximately $2.2 million.
The court discredited the valuation the plaintiff's expert offered. At the same time, it decided a number of aspects of the defense expert's valuation required a correction.
Read more about the court's analysis here.