Battle of the “Rules of Thumb” in North Dakota
In Evenson, a recent decision of the North Dakota Supreme Court, the business which was implicated in a divorce action was an insurance agency. The business owner sold multi-peril crop insurance through local banks for which the owner had previously worked. Both valuation experts agreed that insurance agencies are generally valued by applying a multiplier to the agency’s gross commissions over a period of time.
The wife of the insurance agent testified that a 1.75 multiplier should be applied to an average of gross commissions over the best three consecutive years in the agency’s five year history. (Yes, I said that the wife herself testified.) Her expert testified that 1.5 would be an appropriate multiplier, and 1.75 was “in the upper range.”
The husband testified that a multiplier of 1.0 should be applied to the agency’s gross commissions over the first four years (including the agency’s worst year). The trial court instead applied a multiplier of 1.0 to the agency’s gross commissions in the most recent year (which was neither the best nor the worst, but closer to the worst than to the average). The trial court chose the 1.0 multiplier based on evidence of growing loss ratios, a steady decrease in commission rates, and the testimony of an insurance manager that 1.0 would be an appropriate multiplier under current market conditions.
Finding sufficient evidence to support the verdict, the appellate court sustained the trial court’s decision.