Mississippi Court of Appeals - Cox v. Cox

On January 25, 2011, The Court of Appeals of the State of Mississippi affirmed the ruling of the chancellor in Cox v. Cox (No. 2009-CA-01233-COA).  Several points of the appeal were related to business valuations rendered by a court-appointed expert. 

For the primary business being valued, the chancellor accepted a 50% discount for lack of marketability ("DLOM").  DLOMs are component of the standard (i.e., definition) of  fair market value.  As such, businesses valued at fair market value will consider the DLOM.  50% is an extraordinarily high DLOM, especially when the business was valued using the asset approach, which excluded goodwill and other intangible assets.  However, the expert pointed out that the business had not been profitable in the years leading up to the valuation.  Furthermore, the company, a steel contractor, was having difficulty getting bonded and its primary financial institution was reluctant to continue extending credit.  Finally, the groundwater at the company's site was contaminated and the most recent real estate appraisal did not reflect the contamination in its value.  The preliminary estimate of the cost to cure the contamination exceeded $1 million. 

This case is hardly a mandate to begin using DLOMs around 50%.  However, it does show that the Court will consider higher DLOMs when the circumstances warrant.  Proper analysis supporting a reasonable DLOM should be upheld.

Secondly, the Court upheld the inclusion in the valuation of a contingent asset.  Generally accepted accounting principles preclude the recording of contingent assets because to do so would violate the conservatism principle.  The contingent asset was a lawsuit that settled subsequent to the valuation date.  The chancellor included this settlement in the value of the business.  In general, valuation experts are precluded from considering events that occur subsequent to the date of valuation.  This position raises opportunities or exposures depending on your point of view.

Finally, the Court addressed the issue of valuing patents.  One of the companies valued in this case owned patents related to computer programs used in steel fabrication.  Patents are intangible assets in that their value has limited or no correlation to their cost.  Similar to goodwill, which is an intangible asset, the value of a patent is very subjective and requires professional judgment to estimate. The court-appointed  expert excluded the patents from the value of the company.  The expert reasoned that the Court's definition of goodwill in Singley included all intangible assets.  The chancellor assigned no value to the patents and the Court affirmed this on appeal.  However, it is important to note that no one presented the chancellor with a value for the patents.  Had a value been rendered, it is uncertain whether the chancellor would have assigned value to the patents.