Three shareholders co-own an 8-year old internet-based “marketeer” business that imports Chinese-manufactured sinks, faucets, and related plumbing fixtures that it sells primarily to distributors and retailers in the United States. They successfully apply with a bank for an increased credit facility up to $10 million. The loan application includes monthly cash flow projections prepared by the company’s CFO forecasting over 40% increase in sales the following fiscal year. The owners also submit their personal net worth statements valuing the company around $30 million.
The executed loan agreement includes borrower representations that the cash flow projections have a “reasonable basis.” The personal financial statements include signed certifications that the statements “are true and give a correct showing of my financial condition” and that the statements are submitted to “induce” the bank to extend credit and knowing that the bank “will rely upon the accuracy of all information and representations contained in this financial statement.” Applicable federal law criminalizes the knowing submission of false information to the bank to obtain a loan.
Three months later, one of the owners claiming shareholder oppression petitions for judicial dissolution. The other owners exercise their statutory right to purchase the petitioner’s 24% interest for “fair value.” By statute, the valuation date is the day before the filing of the petition, i.e., also about three months after the cash flow projections and personal financial statements were prepared and submitted to the bank.
At trial, the petitioner trumpets the respondents’ $30 million company valuation on their net worth statements given to the bank and the bank’s reliance thereon. Petitioner’s valuation expert, building on the management projections supplied to the bank, values the company around — you guessed it — $30 million giving 50/50 weight to his discounted cash flow (DCF) income approach (approximately $21.4 million) and his guideline public company market approach (approximately $38.8 million).
The court in its post-trial decision values the company around $6 million or 20% of the value concluded by the petitioner’s expert. Where did the other $24 million go? Read on and find out. Continue Reading $30 Million Appraisal of Plumbing Fixtures “Marketeer” Goes Down the Drain at Fair Value Hearing