Minority Partner Buyouts: To Discount or Not to Discount? Tennessee Appeals Court Rejects Unspecified Discount for Lack of Control

In Boesch v. Holeman, the Court of Appeals of Tennessee at Knoxville addressed the value of a “dissociated” partner’s one-third interest in a whiskey business. The court held that the trial court erred in allowing a discount for the interest’s lack of control. The applicable partnership statute required that value be based on a hypothetical sale of the entire business.

Quick Distillation of the Facts

In 2014, the plaintiff and two others formed a partnership to sell flavored moonshine and whiskey. The plaintiff contributed formulas for various products, as well as providing “sweat equity” with one of the other partners. The third partner provided financing. In December 2015, the plaintiff was dissociated from the partnership.

In 2016, the plaintiff sued the remaining partners on several grounds, including fraud and violation of the Uniform Trade Secrets Act. He also alleged that the defendants breached their fiduciary duties by expelling him from the business and misappropriating his trade secrets.

The trial court dismissed most of the plaintiff’s claims, leaving only one remaining issue: the value of the plaintiff’s interest. The plaintiff’s expert valued the interest at $258,300 in August 2017. He didn’t directly determine the value when the plaintiff left the partnership in December 2015, but he did discount his value back to that date.

The opposing expert valued the interest at only $23,000 as of December 2015. This value incorporated discounts for both lack of control and lack of marketability, but the expert’s report didn’t specify the amount attributable to each discount. The trial court adopted the discounted value.

DLOC Was Inappropriate

The appellate court rejected all the plaintiff’s arguments on appeal, except for his challenge of the interest’s valuation. The applicable Tennessee statute provides that the buyout price for a dissociated partner is the amount that would be distributable were the partnership assets sold for the greater of liquidation or going concern value. The parties agreed that liquidation value wasn’t appropriate.

Under this standard, the court explained, a discount for lack of marketability as to the entire partnership (rather than plaintiff’s interest) was appropriate, but a discount for lack of control by a minority interest holder wasn’t. The court remanded the case to the trial court to recalculate the buyout price according to the statute.

Bottom Line

When buying out a partner who owns a minority (noncontrolling) interest, questions regarding the application of valuation discounts for lack of control and marketability often arise. There is no universal “right” answer. Discuss this matter with your valuation expert to determine what’s appropriate based on the facts of the case, as well as relevant statutes and legal precedent.