Divorces involving family-owned companies often turn on how to value a spouse’s minority, illiquid ownership stake. This article focuses on three practical issues that frequently drive outcomes: (1) how Discounts for Lack of Control (DLOC) and Lack of Marketability (DLOM) are applied to minority interests; (2) how family dynamics can complicate and distort valuations; and (3) how jurisdictional differences shape whether, and to what extent, discounts are allowed. The goal is to blend core valuation concepts with litigation strategies that help attorneys, valuation experts, and courts navigate these disputes efficiently.
Applying DLOC and DLOM to Minority Interests
Minority interests typically face two distinct constraints that can reduce value. DLOC addresses the limitations of non-controlling positions, such as the inability to force dividends or direct strategy. DLOM addresses the time and risk required to sell an illiquid stake. In practice, appraisers commonly see DLOC in a 10%–40% range and DLOM in a 20%–50% range, depending on the facts and the empirical studies used (such as restricted stock studies for DLOM). Because these ranges are vast and methodology choices vary, divorce valuations often see significant disagreement between experts.
The stakes are clear in a simple illustration. Consider a 25% interest in a $10 million family manufacturing company. Before discounts, the pro-rata value is $2.5 million. Applying a 20% DLOC and a 30% DLOM yields a combined discounted value of roughly $1.25 million. That swing – driven solely by discount assumptions – can materially affect equitable distribution, support negotiations, and trial posture.
Two challenges recur. First, subjectivity in quantification: experts may rely on different empirical datasets and judgment calls, leading to wide valuation gaps and protracted proceedings. Second, impact on equitable distribution: aggressive discounts can depress the marital estate. Courts may scrutinize or reject discounts they perceive as manipulative, for example, where an operating spouse inflates expenses or constrains distributions in ways that appear designed to justify a larger DLOM.
From a litigation strategy standpoint, reports that present sensitivity analyses – showing valuation ranges as discount inputs change – tend to read as more credible and help courts understand the drivers. Framing DLOC (control limits) and DLOM (illiquidity/time-to-market) separately, and tying each to specific, case-level facts, can clarify why any given percentage is warranted.
How Family Dynamics Create Valuation Issues
Family-owned businesses are financial assets and emotional legacies. That combination can complicate valuations during divorce and, at times, require forensic accounting to separate signal from noise. Several patterns are common.
- Role imbalances. When one spouse actively operates the business (e.g., CEO) and the other is passive, the operator may take actions that depress near-term earnings or complicate transparency, such as deferring revenue or overstating perks, to minimize the marital pot. In some scenarios, the operator’s exclusion of the non-operating spouse from operations could be cited to justify a higher DLOC. Courts may view such conduct as oppressive if it masks income suppression.
- Emotional interference. Resentment can surface as withheld records or sweeping “legacy” claims that inflate subjective elements like goodwill tied to family reputation. That noise increases the burden on the valuation expert and the court.
- Hidden manipulations. Red flags include unusual related-party transactions (e.g., loans to relatives) or lifestyle shifts that do not square with reported performance. Cash-flow tracing and other forensic procedures can surface these issues, though they add time and expense.
Practical steps can reduce friction. Parties often benefit from neutral, third-party appraisers to build trust and minimize accusations of bias. Experts should document data sources, adjustments, and normalization entries in plain language. When appropriate, they can highlight how governance, dividend policy, buy-sell terms, and information rights inform DLOC and DLOM, without overreaching beyond the record.
Jurisdictional Differences in Treating Minority Interests
Courts differ in both the standard of value and the discount policy, which can materially change outcomes. Two standards recur. Fair market value (FMV) typically contemplates a willing buyer/seller framework and often permits both DLOC and DLOM. Fair value (FV) tends to emphasize proportionate enterprise value and, in many contexts, rejects DLOC to avoid minority penalties, though DLOM may be addressed to reflect illiquidity. Knowing which standard applies (and how local precedent treats discounts) is essential.
Selected references underscore the range:
- New York (FV; DLOM allowed, DLOC barred). Matter of Blake (1985, App. Div. 2d Dept.) is commonly cited for allowing DLOM while prohibiting DLOC in statutory FV proceedings to avoid penalizing minority holders. Pourmoradi v. Gabbai (2021, Cal. App., applying NY principles) grappled with FMV vs. FV in LLC dissolutions, upholding DLOM at the entity level while cautioning against shareholder-level applications that could overweight benefits to majorities.
- California (case-by-case; discounts often allowed under FMV). In re Marriage of Hokanson (1998) permits DLOC/DLOM in equitable distribution if “appropriate,” emphasizing context. In Pourmoradi v. Gabbai, the court applied a 27% combined discount to a minority LLC interest in a real estate holding, distinguishing FMV (used in certain LLC buyouts) from FV (where discounts may be disallowed), reflecting California’s flexibility and the potential for higher discounts in illiquid assets.
- Florida (unsettled; discounts permissible but scrutinized). Munshower v. Kolbenheyer (Fla. Dist. Ct. 1999) follows New York’s Blake in allowing DLOM but rejecting DLOC for FV appraisals.
These differences create a practical roadmap. In FMV jurisdictions, experts should be ready to defend both discount types with evidence grounded in the company’s facts and empirical studies. In FV settings that bar DLOC, experts should focus on how illiquidity manifests at the entity level without double-counting at the shareholder level. Across forums, tying discounts to specific constraints (information rights, transfer restrictions, buy-sell terms, distribution history, and marketability timelines) helps courts evaluate reasonableness.
Pulling It Together
Divorce valuations of minority interests sit at the intersection of technical discounts, family dynamics, and jurisdictional rules. The most persuasive engagements tend to:
- Ground DLOC and DLOM in facts, not broad averages-then show the court how different inputs move the needle.
- Anticipate family-driven distortions, with forensic procedures calibrated to the size and stakes of the case.
- Align to the governing standard of value, citing the controlling local approach to DLOC/DLOM and addressing any entity- vs. shareholder-level concerns.
Ultimately, the expert’s role is to deliver a valuation that is transparent about assumptions, candid about uncertainty, and tailored to the legal forum. In a setting where a 25% stake can fall from $2.5 million to roughly $1.25 million on discounts alone, clarity and jurisdiction-specific analysis are not luxuries; they are necessities for