APPELLATE COURT OF ILLINOIS, THIRD DISTRICT
521 N.E.2d 236, 167 Ill. App. 3d 449, 118 Ill. Dec. 168 1988.IL.380
Appeal from the Circuit Court of Will County; the Hon. Rodney Lechwar, Judge, presiding.
JUSTICE SCOTT delivered the opinion of the court. HEIPLE and WOMBACHER, JJ., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE SCOTT
Defendant, James G. Johnston, appeals the order entered by the circuit court of Will County determining his Hickory Creek, Inc., stock to be of no value, and the value of his interest in a land trust holding title to real estate upon which the corporation's principal place of business was located to be $33,759. Johnston also appeals the denial of a motion to reconvey his corporation stock which was surrendered to Hickory Creek Nursery, Inc., in 1982 pursuant to court order in partial satisfaction of a judgment entered against him in favor of the corporation.
In 1982, Johnston owned one-third of the outstanding stock in Hickory Creek Nursery, Inc., a closely held corporation. Johnston was also an employee of the corporation until 1980. In 1980, the corporation brought an action in the circuit court of Will County alleging that over a period of years Johnston had taken sales revenues for personal use before they were recorded on the corporation's books to the detriment of Hickory Creek and its shareholders. In March 1982, the trial court entered judgment against Johnston in the amount of $365,490. Following issuance of a citation to discover assets, the trial court ordered Johnston to transfer his corporate stock and his interest in the land trust to the corporation in partial satisfaction of the judgment. The court reserved for a later hearing the determination of the value of these transfers to be credited against the judgment.
A hearing was held in February 1987 to determine the value of the stock and the value of the land trust interest as of April 14, 1982. To present evidence as to the value of the corporation in 1982, Johnston called as an expert witness Gregory C. Vlasak. Vlasak stated that he held a bachelor's degree in economics and a master's degree in business administration from the University of Chicago, and that he had valued approximately 200 businesses over the past 10 years, nearly one-third of them being directly comparable to Hickory Creek in terms of assets or sales.
To determine a value for the corporation, Vlasak testified that he examined the corporation's financial statements and tax returns and compared them with two publicly owned nursery businesses. He then applied the valuation methodologies of normalized earning power, discounted cash flow, and balance sheet analysis to the corporation's financial figures. Vlasak concluded that the normalized earning power of the corporation was $75,000 per year after making adjustments for the sales Johnston did not report for the years 1977 through 1981, and for the extraordinary expenses of the instant litigation and the corporation's purchase of a house. He then applied a multiplier of six to the normalized earning power figure and stated that the value of the corporation was $450,000. Vlasak stated he selected a multiplier of six based on a discounting of the multipliers of the two larger publicly held businesses because Hickory Creek was a closely held business.
In performing a discounted cash flow analysis of the corporation, Vlasak reported that Hickory Creek's sales had grown 15% annually during the period 1978 to 1981, and he projected that its sales would increase 10% annually the following 5 years and in 1987 there would be a 5% sales growth. The discounted cash flow analysis, i.e., the estimated amount of cash which would be available to the shareholders of the corporation, resulted in a corporation value of $430,000. Vlasak testified that his balance sheet analysis confirmed the values arrived at from the normalized earning power and discounted cash flow analyses and concluded that Johnston's one-third interest in the corporation should be valued at $150,000. He further testified that no "minority interest" discount should be applied to this value as his shares were surrendered to the corporation to the benefit of the remaining shareholders, but if a discount were applied because of a transfer to a third party, he stated it would range from 10% to 35%.
Hickory Creek presented Arthur L. Crandell, CPA, as its expert witness on corporation value. Crandell stated that in his opinion a normalized earnings power analysis was not appropriate for any business with sales or assets less than $12 million and that a formula or "cookbook" analysis was more appropriate to determine value for a corporation the size of Hickory Creek. To value a corporation using this valuation methodology, Crandell stated one first calculates the value of a corporation's tangible assets, i.e., its physical and financial assets, minus liabilities, and then assigns an intangible value to the corporation only if its earnings are above average for the industry classification of the corporation, or if the corporation has multiple lines of business, its earnings in these lines are above average. A capitalization rate is then assigned to both values to arrive at an overall corporation value.
In applying this methodology to Hickory Creek, Crandell reported that even though the corporation's 1981 earnings were $105,998, the value of Hickory Creek was zero, due in part to only a small percentage of its earnings exceeding average industry earnings and the value of its tangible assets failing to exceed its liabilities. Crandell testified, therefore, that Johnston's one-third interest in Hickory Creek Nursery, Inc., was valueless.
In contrast to Vlasak's balance sheet analysis, Crandell did not include as a financial asset Johnston's judgment debt to the corporation, nor did he include the value of the unreported sales revenues when he calculated profitability. Further, in valuing the corporation's tangible assets, Crandell stated he valued the house owned by the corporation at $144,673, versus a balance of $225,000, which was used by Vlasak in his balance sheet analysis and which was the price the corporation was asking for the house.
To testify as to the value of his interest in the land trust, Johnston presented an MAI appraiser, William McCann, as an expert witness. Both parties stipulated that McCann was an expert in the field of real estate appraisal. In determining a land trust value, McCann stated he employed both a market analysis and a capitalized rate of return analysis using the actual land trust rental ...