Changing Tides on Lack of Marketability in Tennessee Courts

For years, cases such as Bertuca¹ and Barnes² governed the landscape on the issue of marketability in the valuation of marital assets in Tennessee family law cases. Specifically, Bertuca involved a company called Capital Foods which held several McDonald’s franchise locations. In the decision, Bertuca did not allow for a discount to be taken for the lack of marketability for a nonpublicly traded company and offered the following reasoning:

“...no indication…has any intention to sell…thus, the value of the business is not affected by the lack of marketability and discounting the value for nonmarketability in such a situation would be improper.”

While Barnes involved a dental practice, the Court offered a similar explanation for excluding a discount for lack of marketability:

“...inappropriate because no sale was ordered and there [was] no indication in the record that the Husband ha[d] any intention of selling his minority stock.”

Both cases focused on the lack of an actual/imminent sale rather than the lack of marketability of these two underlying companies when compared to a publicly traded equivalent. The cases also left business valuation appraisers in a quandary, since this treatment of the lack of marketability didn’t seem to match the fair market value standard. The fair market value standard, discussed in Revenue Ruling 59-60, discusses the relevance of a willing buyer and a willing seller and also allows for potential discounts for lack of control and lack of marketability, where applicable.

So what has changed now? In April 2017, House Bill 348 was passed by the Tennessee legislature. This Bill amends the Tennessee Code Annotated Title 36, Chapter 4 (TCA 36-4-121), relating to the equitable division of marital property. Specifically, this Bill allows for “considerations for a lack of marketability discount, a lack of control discount, and a control premium if any should be relevant and supported by the evidence for such assets” “without regard to whether the sale of the asset is reasonably foreseeable.”

Effective July 2017, discounts for lack of marketability can now be considered in the valuation of assets in family law disputes. As with the valuation itself, it’s important to hire an accredited/credentialed business valuation appraiser to assist in the determination, documentation and support of any discounts for lack of control and marketability, along with any applicable premiums.

End Note

¹ Bertuca v. Bertuca, No. M2006-00852-COA-R3-CV, 2007 WL 3379668 (Tenn Ct. App. Nov. 14, 2007).

² Barnes v. Barnes, No. M2012-02085-COA-R3-CV (Direct Appeal from the Chancery Court for Bedford County No. 27833, April 10, 2014).