Are Valuation Discounts Appropriate in LLC Member Statutory Buyouts?

Gregory A. Barber, C.F.A.

Gregory A. Barber is the Managing Director of Barber Analytics, LLC., located in San Francisco. Mr. Barber has over twenty-five years of public and private company valuation and shareholder dispute experience, including a number of shareholder buyout cases, one resulting in a published decision.

Prior to 2010, most of the dissolution and buyout cases that were decided by the California courts of appeal involved corporations, with plaintiffs seeking buyouts under California Corporations Code § 2000. Given the rise in popularity of limited liability companies (LLCs), there have been an almost equal number of LLC buyout cases since 2010. The LLC buyout option language in California Corporations Code § 17707.03 is similar to § 2000. However, the language is not precise from an appraiser’s perspective and could lead to a lower value being attributed to an LLC member’s interest than would be determined under the § 2000 language. In addition, LLCs are often more complex to value accurately because of their unique tax status, i.e., they are not taxed at the entity level.¹ These factors raise some difficult valuation issues, which have been the subject of much dispute in the valuation community and, more significantly, in the courts, for the better part of two decades.

Review of Corporate and LLC Buyout Statutory Language