SC Supreme Court persuaded regarding use of normalization adjustments


First the trial court found that two shareholders in a South Carolina medical supply company had been diverting funds to pay themselves excessive salaries. Next, it ordered the shareholders to buy-out the dissenting owners and appointed a business appraiser to determine statutory fair value. In his engagement letter, the appraiser agreed to comply by the AICPA’s Statement of Standards for Valuation Services as well as NACVA’s professional standards. Per the parties’ instructions, he also agreed to use the income approach. When he valued the company at $34,000.00, however, without adjusting the owners’ salaries, the dissenting shareholders appealed. The appraiser not only failed to abide by the court’s prior findings (that the salaries were excessive) but he also failed to apply the agreed-on income approach. Moreover, both the AICPA and NACVA professional standards require normalization adjustments as a “key step” in the income approach, the plaintiffs said—but the state appellate court disagreed, finding the trial court had “no evidence” that the appraiser prepared his report incorrectly.

The plaintiffs took their appeal to the S.C. Supreme Court—which reversed. The trial judge was presented with the appraiser’s report, which clearly did not normalize the corporate salaries; the AICPA and NACVA standards were also evidence of appropriate valuation adjustments, which the trial court simply “declined to consider.”  At a minimum, the plaintiffs showed that the defendants’ salaries were excessive, and pursuant to the agreed-on income approach, “some normalization adjustment was required,” the court held, and vacated the fair value appraisal.

Read the complete digest and court's opinions in Blackburn v. TKT and Associates, Inc., 2010 WL 2035369 (S.C.)(May 24, 2010)  at BVLaw™.


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