Two Man Service Sales Company Valued in TN Divorce

Tennessee business valuation law case summary for business selling services to auto dealers including new car warranties, extended service contracts, credit insurance, alarms, etc.. Tennessee divorce and family law from the Tennessee Court of Appeals.

Edenfield v. Edenfield – Tennessee Divorce Business Valuation Case – Service Company – Two Man Operation Ended

The major source of contention in this divorce case stemmed from the valuation and allocation of the husband’s one-half interest in a service company which the he founded and co-owned with his business partner during his marriage.  The trial court awarded the business, and the $50,000 debt associated with it, to the wife, who appealed that decision on the grounds that her husband took actions which essentially rendered the company without value. The appellate court held that the business had no real value apart from the efforts of its principals, and consequently modified the valuation of the business, as well as the allocation of the related debt.

James and Kara Edenfield were married in 1993.  Kara Edenfield was a college graduate and only a few credits shy of earning her M.B.A. from Bristol University when the school closed.  Thereafter, Ms. Edenfield had several jobs and was earning $70,000 per year as an information technology consultant for Deloitte and Touche before she gave birth the couple’s son in 1997.  After the birth of their son, the Edenfield’s agreed that Kara would quit her job to and her husband James would support the family.

James Edenfield was a high school graduate and attended college for a year and a half before going into the Air Force for four years. Subsequently, Mr. Edenfield worked for Clayton Homes and then as a car salesman and dealership manager until he started a business with former employer Scott Lewis in 1995.  Leveraging his experience in the automobile dealership industry, Mr. Edenfield founded First Choice, a service company which offered various types of products to car dealerships such as new car warranties, extended service contracts, credit insurance, alarms, etc.

The only actual business assets First Choice had been a checking account, two fax machines, and two cell phones.  The business itself did not retain any significant amounts of capital.  Mr. Lewis and Mr. Edenfield were the only two company employees, both receiving salaries.  First Choice did not have exclusive contracts to sell its products, all of which were supplied by other companies. All of the business revenue rested on the salesmanship of Mr. Edenfield and Mr. Lewis, both of whom operated out of the trunks of their cars.  Within several years their hard work paid off, with Mr. Edenfield earning $104,264 in 1999 and $116,253 in 2000 at First Choice, in addition to receiving company benefits which included health insurance, travel expense reimbursement, a retirement plan, and tickets to Nascar races for himself and his clients.

However, Mr. Edenfield decided he needed a steadier income once his wife became pregnant and the parties decided she should quit her job.  He sold his half interest in First Choice to his business partner Scott Lewis for $50,000.  Approximately one year later, Mr. Edenfield wanted to buy back his share of First Choice, but by then the $50,000 had already been spent, so Mr. Edenfield used the available equity in the marital home to refinance and obtain the $50,000 he needed for the buy back.

Mr. Edenfield’s work involved a significant amount of traveling, and he admitted at his divorce trial that he had a number of brief affairs and one-night stands with other women, but in March of 2000 he met a woman with whom he got involved in a more serious, longer term relationship.  When Mrs. Edenfield discovered her husband’s affair in May of 2000, she left the marital home and filed for divorce the next month.

At trial, the divorcing parties offered differing estimates of the value of the business. Mr. Edenfield’s expert witness and accountant for First Choice, Glenn Thompson, C.P.A., testified that since the company had practically no assets nor employees other than Mr. Lewis and Mr. Edenfield, and it did not have exclusive contracts with any suppliers or any dealerships, First Choice had no value separate from the efforts of its two owners and it was unlikely that any buyer would be willing to pay a substantial amount for a share in the company. Therefore, Mr. Thompson gave an estimated business valuation around $5,000 or $10,000.

Mrs. Edenfield’s expert witness C.J. Hulen C.P.A., valuated the business using the capitalization of income method, considering a stream of benefits, such personal income in this case, and then interpolating between several possible rates of return on assets, converting that stream into a business value. Using this method, Mr. Hulen estimated a business valuation of $344,780 for Mr. Edenfield’s half of the business, and testified that he believed that if a skilled salesman acquired the business, he could eventually start making the amount of money previously earned by Mr. Lewis and Mr. Edenfield.  The court sided with Mrs. Endenfield and in a Memorandum Opinion dated November 19, 2001 awarded her the one-half interest in First Choice, valued at $344,780 along with the $50,000 mortgage debt associated with the business.

Approximately one month later, Ms. Edenfield filed a motion requesting that the court reconsider its award claiming that First Choice lost its value and consequently, the debt burden of the asset was unjust.  Subsequent to the court’s decision, Ms. Edenfield discovered that the company had been administratively dissolved by the Secretary of State, Mr. Edenfield was no longer working at First Choice, and Scott Lewis had notified her that he was not interested in working for First Choice without Mr. Edenfield. The trial court denied Ms. Edenfield’s request.

On appeal, the appellate court decided to value Ms. Edenfield’s interest in the business at zero and apportion the $50,000 debt related to the business equally to both parties.  Mr. Edenfield’s value was correct and if she was awarded the business, which is unusual, it should not be valued at the amount as if it were an ongoing business.

No. E2004-00929-COA-R3-CV (Tenn. Ct. App. Oct. 31, 2005).

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.