Trucking & Transportation TN Business Valuation

Tennessee business valuation law case summary – transportation and trucking business. Tennessee business valuation law from the Tennessee Court of Appeals.

Bloggers Note:  Although this is not a divorce case, it is one of the leading business valuation cases often cited by the Tennessee Court of Appeals in divorce cases with business valuation.

East Tennessee Transportation, Inc., v. Ketron – Tennessee Trucking Company Business Valuation.

The East Tennessee Transportation Company was incorporated in 1982, and had two stockholders:  Roy Ripley was the President of the company and owned 51 shares.  Kilbur Ketron owned the other 42 shares.  The company was merged with another, and Mr. Ketron demanded payment for his shares under the Tennessee dissenter’s rights statute.

As of December 31, 1988, the corporation had current assets of $639,525; current liabilities of $321,201; revenues of $3,949,585; and a net worth of $494,077.  It had five trailers, 45 employees, and one terminal.

The corporation’s own accountant valued each share at $5,184.51, which was less than half the amount demanded by the dissenting shareholder, Mr. Ketron.  The trial court found that the fair value of each share was $9,644.  The trial court also held that the company had acted arbitrarily and vexatiously in making its lower determination.  Therefore, the trial court awarded Mr. Ketron his expert witness fees and costs, but not attorney fees.  The Court of Appeals affirmed.

The Tennessee Supreme Court adopted the Delaware block valuation method in 1983, in Blasingame v. American Materials, Inc., 654 S.W.2d 659 (Tenn. 1983), and the appellate court followed that method in this case.  Under the Delaware block method, the court must consider three separate measures of a stock’s value:  Earnings value, asset value, and market value.  These values are then weighted.  In assigning a weight to each value, the court takes into consideration the type of business, the objectives of the corporation, and other relevant factors.  The fair value is then the sum of the three weighted values.

Three expert witnesses testified at trial.  Dr. John Andrews testified on behalf of Mr. Ketron.  Dr. Andrews was an economist and professor at Emory University Graduate School of Business in Atlanta.  Among the courses taught by Dr. Andrews were ones in valuing corporations.  He had also taught valuation sessions for Eastman Kodak Company in Kingsport, Tennessee.  He had previously served as an expert witness in a 1987 business valuation case that had come before the Tennessee Court of Appeals, Elk Yarn Mills v. 514 Shares of Common Stock, 742 S.W.2d 638 (Tenn. Ct. App. 1987).

Dr. Andrews assigned a market value of zero, with a weight of zero.  He assigned an asset value of $684,275, with a weight of 25%.  Finally, he assigned an earnings value of $1,172,990, with a weight of 75%.  The weighted sum of these values was $879,742.

The two experts for the corporation were Messrs. Gardner and Holt, were not identified by the court’s opinion.  One of these experts was disdained by the trial court, and the other (presumably, Mr. Holt) was viewed as an advocate for the employer, since he was the company’s regular accountant.  The trial court found Dr. Andrews’ testimony most reliable.  The trial court largely accepted the valuations assigned by Dr. Andrews, making only a small adjustment in the earnings value (changing it from $1,172,990 to $1,109,990).  The trial court, however, did change the weighting of these values.  The trial court weighted both the asset value and earnings value equally at 50%, arriving at a fair value of $9646 per share, which was approximately 15% less than the value assigned by Dr. Andrews.

In setting the earnings value, Dr. Andrews had used a price/earnings ratio of 10.74, which he had gleaned from Standard & Poore’s.  The corporation criticized this choice, since the index included “the largest airlines, railroads and trucking companies in the world,” whereas the corporation in this case was a small trucking company.  The appellate court noted that the allegedly comparable companies were, on average, almost 900 times larger than the plaintiff corporation in terms of assets; over 700 times larger in terms of liabilities; over 600 times larger in terms of revenues; over 1400 times larger in terms of net worth; and over 400 times larger in terms of number of employees.

Despite these differences in size, both the trial court and the appellate court held that Dr. Andrews’ testimony could not be rejected for this reason alone.  The Court of Appeals thus affirmed the trial court’s determination.

Both the trial court and the appellate court also agreed that under the dissenters’ rights statute, it was appropriate to value the company as of the end of the calendar year, despite the fact that the company operated on a fiscal year basis.

East Tennessee Transportation, Inc., v. Ketron, 1991 WL 28943 (Tenn. Ct. App 1991).

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.