After 27 years of marriage, a Colorado couple got divorced. The husband’s main asset was a share of an oil and gas company that was worth $2.5 million. However, for purposes of dividing the couple’s property, the divorce judge reduced the value of the husband’s share by one-third, to about $1.6 million.
The judge explained that this was a “marketability discount.” The idea of a marketability discount is that, while the husband’s interest might have been “worth” $2.5 million if you simply divided the value of the business by his percentage interest, it wouldn’t be “worth” $2.5 million if he tried to sell his interest to a third party. That’s because a third party probably wouldn’t want to pay full value for a minority stake in a business, given that he or she would be a minority owner and would have no control over the operations.
Marketability discounts are common in certain types of accounting. For instance, the value of a share in a family business is often reduced for tax purposes because few people would want to be a minority owner in someone else’s family business.
The wife argued that marketability discounts shouldn’t apply, and in fact don’t apply in many situations. For instance, in Colorado, if a corporation buys out a dissenting minority shareholder, it’s not allowed to apply a marketability discount in calculating the value of the shareholder’s interest.
The case went to the Colorado Supreme Court, which sided with the husband and said that a marketability discount in divorce is different from a discount in the case of a shareholder buyout.
The court didn’t say that marketability discounts should always be applied in divorce cases, but it said the judge was reasonable in applying it in this case.