No Minority Interest Discount for TN Divorce Business Valuation

Tennessee business valuation law case summary – Printing Business. Tennessee divorce and family law from the Tennessee Court of Appeals.

Morrison v. Morrison – Tennessee business valuation law – Printing Business

Elizabeth and Richard Morrison were married in 1972 at the ages of 18 and 22, respectively.  Mr. Morrison was employed in his father’s business, Morrison Communications Inc.  In 1978, he was promoted to president of the company.  Mrs. Morrison worked various jobs until their child was born in 1981, after which she devoted her time to being a housewife and mother.

Morrison Communications was owned by the husband’s father, J.C. Morrison, Sr.  The company was a holding and management company of two other corporations, Morrison Printing Co. and School Calendar Company, Inc.  Morrison Printing did printing and lithographic work, and much of its business was for the recreation and travel industry.  The calendar company produced posters for schools and universities.  The two companies employed between 175 and 200 people, and had annual sales between $16 and $18 million.

In 1982, the elder Morrison sold the stock of Morrison Communications to his three children for $500,000, payable in monthly installments over ten years.  Under a later 1983 agreement, the corporation and the three owners agreed to pay the parents a portion of the corporation’s profits, to give the parents “the standard of living to which they had become accustomed.”  There was, however, no evidence of such payments being made by the corporation until after the note had been paid, at which time the three children began personally making payments to the parents of $2,000 per month, for a total of $6,000 per month.

The parties separated in 1994, and the wife filed for divorce, citing inappropriate marital conduct by the husband and irreconcilable differences.

While Mr. and Mrs. Morrison settled most issues by negotiation, one of the remaining issues was the value of the Morrison Communications stock.  The trial court found this value to be $350,000.  At trial, each party offered the testimony of an expert witness, in both cases a certified public accountant.

The wife’s witness,Mr. Holt, took the position that no deduction should be made to reflect the husband’s minority interest.  He valued the stock of the entire corporation at $3,587,865, and the husband’s one-third interest at $1,195,955.

The husband’s witness, Mr. Bacon, took the position that the minority interest warranted a 30% deduction.  He valued the full company at $1,491,000.  Thus, after taking the 30% deduction to account for the minority interest, he arrived at a value of $348,000 for the husband’s share.  The trial court found Mr. Bacon’s testimony to be more persuasive, and fixed the value at $350,000.

The Court of Appeals, with little discussion, accepted the overall value of $1,195,955.  However, it disagreed with the need to discount, and thus accepted the value of the husband’s shares of $497,000.  The court of appeals held that there was no reason to discount because the three owners had purchased life insurance at company expense, the intention of which was to purchase the interest of any deceased owner.  In addition, if any of the owners desired to sell the stock during his or her lifetime, the other children had a right of first refusal.

Based upon these facts, the Court of Appeals held that a discount was not appropriate.  If the husband outlived his siblings, he would be the sole owner of the company.  And if he did not, he received the benefit of a life insurance policy paid for by the company.

1996 WL 266111 (Tenn. Ct. App. 1996).

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.