Quality Systems Business Valued at $425K in TN Divorce

Tennessee business valuation law case summary – concrete materials sales. Tennessee divorce and family law from the Tennessee Court of Appeals.

Henderson v. Henderson – Tennessee Divorce Business Valuation Case

How much discretion does a Tennessee divorce court have when determining the value of a business for equitable distribution upon divorce?  Quite a bit, according to a Tennessee Court of Appeals decision in Henderson v. Henderson.  This case tells the story of George and Marilyn Henderson who were married on December 26, 1989.  After nearly a decade of marriage, on March 21, 1997, a confrontation occurred between the couple which resulted in Mr. Henderson being charged with aggravated assault, aggravated kidnapping and attempted murder. Mr. Henderson was later acquitted of all charges, but he did file for divorce from his wife Marilyn on March 27, 1997.

After hearing testimony from both parties, on February 8, 1999, the trial court entered a Memorandum order which determined the value of the marital business to be $425,000.  Mrs. Henderson believed that the trial court undervalued the business and filed an appeal.  The Tennessee Court of Appeals affirmed the trial court’s decision believing that the business valuation of the court was within the range of the evidence submitted and there was no reason to question it.

The business in question, Quality Systems, Inc., was formed by Mr. Henderson in May 1990. Mr. Henderson was the president and Chief Executive Officer of Quality Systems, but received no benefits or salary from Quality Systems until May 1995. During that time, Mr. and Mrs. Henderson lived off of Mr. Henderson’s assets acquired before the marriage and Mr. Henderson loaned money to Quality Systems from these same assets. In May 1995, he received a monthly salary of $6500 which increased to $10,000 by the time of the trial. By that time, Quality Systems owed Mr. Henderson $79,804.75. Mrs. Henderson worked as a pharmacist and then sold home security systems until early 1993 when she became a sales representative for Quality Systems.

Quality Systems sold and installed Perma-Crete and also recruited dealers to sell and use Perma-Crete.  Perma-Crete is an acrylic polymer cement compound used in the resurfacing of sidewalks, driveways, building exteriors, pool decks and pool interiors. Direct sales only constituted 10% of Quality Systems’ business. Primarily, Quality Systems focused on recruitment of contractors to become dealers of Perma-Crete. Quality Systems did not manufacture Perma-Crete, rather it paid other companies to blend the bag mixes and sealers. At the end of 1998, Quality Systems had 22 employees. Since Quality Systems began in 1990, the leased premises increased from 550 square feet to 8,000 square feet. Quality Systems owed $375,000 or $375,000 in Perma-Crete products to 300 of its dealers.   Due to the dealer credits and other liabilities, Quality Systems’ liabilities exceeded assets by $445,000 as of November 30, 1998.

At trial, Mr. Henderson produced expert witness Tom Price, a partner with a Certified Public Accounting firm in Nashville, Price & Associates, who estimated the value of Quality Systems at $108,248 as of November 30, 1998.  For his evaluation of Quality Systems, Mr. Price toured the facilities and talked to Mr. Henderson, as well as other officers and employees of the corporation.  Mr. Price conducted an in-depth financial analysis of Quality Systems, by reviewing the general ledgers for 1997 and 1998, financial statements from 1990-1998, the business plan written in 1996, dealer growth analysis from 1993-1998, income tax returns from 1990-1998 and the subsidiary ledgers. He also compared Quality Systems to 3,392 companies in the same industry to discover the average net income, after tax, of 1.5% of total sales. Mr. Price identified that Quality Systems’ strengths were capable and efficient management, high-grade materials, large dealer network, fair market value leases on office warehouse and training facilities, excellent distributor relations and strong name recognition. However, Quality Systems also had weaknesses which included its relative size to the rest of the industry, weak financial position, continued operating losses, lack of adequate working capital and lack of marketability of stock as a result of being a closely held corporation.  When determining a value for Quality Systems, Mr. Price considered these strengths and weaknesses.

Mrs. Henderson’s expert witness, William Neiman, the president and only employee of Neiman-Ross Associates, Inc., valued Quality Systems at $1,551,443 as of November 30, 1998. Mr. Neiman visited the facilities of Quality Systems, talked to Mr. Henderson, reviewed balance sheets and income statements from 1994-1998, account transaction histories, ledger trial balances, the lease for the premises and the business plan. The business plan Mr. Henderson wrote in 1996 expressed his intention to take the company public in 2-3 years. This, however, was not information Mr. Neiman considered in his valuation. Rather, Mr. Neiman valued the company’s future earnings potential, based on the fact that the number of dealers with Quality Systems had increased at 96.67% annually over the last five years and the revenues per dealer had increased 6.38% annually. Additionally, he considered that gross sales had grown from $992,000 to $3,049,000 between 1994 and 1998. Mr. Neiman also compared Quality Systems to two other companies in the same industry, Dryvit and an unidentified small Tennessee company.  Taking these factors into consideration, Mr. Neiman assessed a net operating income of 9.4% for Quality Systems as compared to Mr. Price assessing a 1.5% figure.

After two days of expert testimony, the trial court came to a valuation of Quality Systems worth at $425,000.  On review of the trial court’s decision, the Appellate Court held that value of a marital asset is ascertained by considering all relevant evidence regarding value, the burden is on the parties to produce this evidence of value, and the parties are bound by the evidence they present. Consequently, the trial court may, at its discretion, place a value on a marital asset that is within the range of the evidence submitted.

Henderson v. Henderson, M1999-00912-COA-R3-CV, Court of Appeals of Tennessee at Nashville, Sept. 14, 2000.

See original opinion for exact language. Legal citations omitted.

To learn more about Tennessee business valuation law, see Business Valuation in Tennessee Divorce Law. To learn more about the division and valuation of professional practices in divorce, see When Professionals Divorce in Tennessee: Valuing Professional Practices.

Miles Mason, Sr. JD, CPA handles complex divorce matters including business valuations and forensic accounting issues. View his professional biography listing books and articles published on business valuation and forensic accounting and seminars presented to lawyers, judges, business valuation experts, and forensic accountants. Miles Mason, Sr. authored The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association. The Miles Mason Family Law Group, PLC’s offices are located in Memphis, Tennessee and serves West Tennessee and Nashville. Contact Us today at (901) 683-1850.