Fast Food Franchise Value Should Be Based on Cash Flow

Tennessee business valuation law case summary – fast food franchises. Tennessee divorce and family law from the Tennessee Court of Appeals.

Bertuca v. Bertuca – Tennessee business valuation case – fast food franchise – NOTE: this is the second article on this case in our blog.

What is the best method for calculating the value of a business entity for the purpose determining marital assets in a Tennessee divorce?  According to the Tennessee Supreme Court, there are a number of acceptable methods, with the choice of proper method being very specific to the facts and circumstances of each business.

In Bertuca v. Bertuca, Christina Jo Bertuca filed for and was granted a divorce from her husband Theodore Joseph Bertuca on June 23, 2005.  However, the trial court did not decide the issue of a division of marital assets until February 2006.  The main marital asset at issue was Mr. Bertuca’s ninety percent ownership in Capital Food Services, a Tennessee general partnership that owned and operated seven McDonald’s franchises in Wilson County, Tennessee.

Mr. Bertuca and his father formed Capital Food Services partnership December 29, 2000. Though the elder Mr. Bertuca only owned a ten percent partnership interest, both father and son  had equal rights in the management of the partnership business.

The elder Mr. Bertuca also owned McDonald’s Management Company which provided management services to McDonald’s franchises for a fee of approximately 4.76% of total sales.  However, McDonald’s Management Company provided services to Capital Food Services free of charge.

In 2004 Capital Food Services borrowed $2,230,000 from AmSouth Bank in order to buy seven McDonald’s franchises totaling $2,345,000.  Capital Food Services also contributed $150,000 of its own to purchase the franchises.  In order to raise his 90 percent contribution, the younger Bertuca borrowed $124,200.00 from his father and business partner, a debt which was still outstanding at the time of his divorce trial.

When the franchises were purchased in 2004, McDonald’s Corporation notified Capital Food Services that one of the franchise restaurants would have to be rebuilt. Consequently, Capital Food Services had contracted to have one of the franchise restaurants rebuilt at a cost of $950,000, another outstanding liability at the time of the younger Betuca’s divorce.

At trial, Mr. Ted Bertuca presented his valuation expert, Burt Landers, a certified public accountant with experience representing fourteen McDonald’s franchisees and involvement in the purchase or sale of 125 McDonald’s franchises.

Using the free cash flow method of business valuation, which Mr. Landers testified was standard valuation practice for McDonald’s franchises, he determined the net value of the seven McDonald franchises to be $484,734.41, with the younger Mr. Bertuca’s interest in the franchises actually having a negative value as a result of the obligation to rebuild one of the restaurants and the $124,200 debt to the elder Mr. Bertuca.

David E. Mensel, a certified public accountant experienced in forensic accounting and business valuation, provided expert trial testimony for Ms. Betuca.  Mr. Mensel held certification as a valuation analyst, and had written and taught a course called Normalizing Projected Earnings for the National Association of Certified Valuation Analysts.

Mr. Mensel used a capitalization of income method for valuating Capital Food Services, valuing the business at $3,078,042 net of the indebtedness using a twelve percent capitalization rate based on the information originally supplied to him.

To rebut to Mr. Mensel’s testimony, Mr. Bertuka presented additional expert Ms. Claudia Shaw, a certified public accountant and a managing partner at the firm, Foelgner, Ronz & Straw of St. Petersburg, Florida.  Ms. Straw specialized in McDonald’s franchises and served as Chairman of the National Franchise Consultants Alliance, a group of nine certified public accountant firms throughout the United States that predominantly represent McDonald’s franchisees.

Ms. Straw testified that the discounted cash flow method is the most appropriate method of valuating a McDonald’s franchise.  Using this method, future franchise income is projected and discounted to the present day. Ms. Straw testified that because Capital Food Services had accumulated some cash in excess of its current liabilities, capital equity in the business as of the date of divorce amounted to $493,000.   After reducing Mr. Bertuca’s ninety percent interest by a twenty percent marketability discount and the $124,200 indebtedness, Ms. Straw determined Mr. Ted Bertuca’s interest in Capital Food Services at $231,000.

Based upon all evidence and testimony given, the trial court held that the fair market value of the increase of value of Capital Food Services during the marriage was one million dollars, $900.000 being the 90 percent interest of the younger Bertuca.  Consequently, Ms. Bertuca, was awarded $450,000 as her interest in Capital Food Services.  Mr. Ted Bertuca appealed the trial court’s decision alleging the trial court’s valuation of Capital Food Services was contrary to the evidence.

The Tennessee Supreme Court in Blasingame v. American Materials Inc. stated that there are a variety of acceptable methods for determining the value of a business, such as (1) the market value method, (2) the asset value method, and (3) the earnings value or capitalization of earnings method.  Which valuation method is most appropriate depends on the unique circumstances of each business.

In this case, the Tennessee Appellate Court held that the best method of valuation of a business such as Capital Food Services would be the capitalization of income approach since the primary value of Capital Food Services was the income it produced. Using the capitalization of income method of valuation, the Appellate Court determined that, based on the evidence provided, Capital Food Services had a value of $1,033,393 at the time of the divorce, and since that value approximated the value found by the trial court, the trial court’s decision was affirmed.

Bertuca v. Bertuca, No. M2006-00852-COA-R3-CV (Tenn. App. 2007).

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, 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.