In Muchmaker Estate (Re), 2019 ONSC 59, the court had to interpret a provision in the deceased's secondary will for determining the purchase price of his business, among other issues.
Jay Muchmaker died in 2015. He was the founder of Master Auto Supply Co Limited in 1999, and his interest in the company was addressed in a secondary will.
Paragraph 4(i)(i) of the secondary will conferred on Mr. Larry Weissmann - who worked for Master Auto and succeeded Mr. Muchmaker as president of the company - to buy the business. Specifically, the will stated that Mr. Weissmann had an option to purchase Master Auto for the lesser of:
- $1.75 million, or
- "the price determined by multiplying the earnings of Master Auto (averaged over the last three fiscal periods) by a factor of 5.5"
Mr. Muchmaker's estate trustee, Mr. Yaniv Loran, began administering the estate. Master Auto's bookkeeper was asked to calculate the purchase price of Master Auto based on Paragraph 4(i)(i) of the secondary will.
The bookkeeper determined the purchase price by using Master Auto's earnings from its financial statements (before income, depreciation, taxes, or amortization - i.e. it's EBITDA).
Mr. Loran disagreed with the bookkeeper's calculation and approached a firm, Valufin Services Inc., to prepare a valuation "to estimate the fair market value" of the business. Valufin determined the fair market value was $1.09 million.
Since the will doesn't say to use "fair market value", Mr. Loran instead used Valufin's underlying calculation of a "normalized net income" that went into its fair market valuation. The normalized net income differed from the EBITDA in that it adjusted certain costs to better reflect market conditions (e.g. by reducing "excess" salary to Mr. Muchmaker, and removing business expenses that were really personal expenses). This resulted in a normalized net income of $239,445.
Mr. Loran then plugged this normalized net income into the formula from Paragraph 4(i)(i), resulting in a purchase price of $1.17 million.
Mr. Weissman wanted to exercise his option to buy Master Auto, but disagreed with Mr. Loran's calculation of the purchase price. Mr. Weissman then hired SLF Financial Services to prepare its own valuation report, which found that no adjustments to EBITDA were necessary. SLF determined the purchase price was $514,419.
The issue for the court was which type of earnings should be used to determine the purchase price? Straight EBITDA or adjusted/normalized? Using normalized net income increases the purchase price for Mr. Weissman by roughly $600,000.
Penny J.'s Ruling
The will doesn't mention anything about normalizing the earnings, which suggests that EBITDA from the financial statements should be used. That said, Mr. Muchmaker used Master Auto for a lot of personal benefits, including "personal life insurance, home repairs and the like".
Penny J. took a middle ground approach and found that the earnings should be normalized only by removing these personal benefits. Other normalizations by Valufin, such as reducing Mr. Muchmaker's salary, were not accepted.
The final purchase price was $529,611.
When drafting a will, clarity is paramount. This is especially important when complicated assets (like businesses and options to purchase them) are involved. Ambiguity can result in expensive and prolonged litigation.
To read about the other issues in the case, click here.