Textbook Distributor Business Valued at $220K in TN Divorce
Tennessee business valuation law case summary – Textbook Distributor Business. Tennessee divorce and family law from the Tennessee Court of Appeals.
Kerce v. Kerce – Tennessee Business Valuation Law – German Textbook Distributor
Ascertaining the value of a closely held corporation is not an exact science, and the Tennessee courts have not identified a consistent approach to the valuation of this type of marital asset.
However, the Court of Appeals in Kerce v. Kerce recognized Rev.Rul. 59-60 as the most comprehensive guide, containing nine factors to take into consideration when determining the value of a closely held corporation. These factors include:
(1) the nature of the business, including its history since organization,
(2) the economic status of the industry and the nation at the critical date of valuation,
(3) book value,
(4) earnings,
(5) dividends and dividend paying capacity,
(6) the existence or lack of good will or other intangible value,
(7) sales of the stock and the size of the block to be valued,
(8) the selling price of comparable securities relative to their earnings, dividends and asset values,
(9) the life insurance proceeds received by a corporate beneficiary on a policy covering the sole or controlling stockholder.
To illustrate the point, Barbara and Steven Kerce, who were married on July 4, 1988, owned a business together which needed to be valued for the purposes of division of marital property upon their divorce in February of 2002.
The Kerces were highly educated individuals. Ms. Kerce held a Bachelor’s Degree in German literature from the University of Wisconsin, and at the time the couple married, she was working as president of Adler’s Foreign Books.
Mr. Kerce received a Bachelor’s Degree in English literature from the University of California, a Master’s Degree in comparative literature from the University of Chicago, and held a PHD in comparative literature from the University of Chicago. Mr. Kerce was also a Fullbright Fellow at Gennaidon Library and worked full-time as a computer software program manager since 1989.
In July of 1989 the couple relocated to Huntsville and formed International Book Import Service, Inc. (IBIS), a German book distributing business. Ms. Kerce was the chief officer and manager of the daily operations of the business, while Mr. Kerce worked as a computer consultant for IBIS. In 1997, the Kerces relocated to a 271 acre farm in Moore County, Tennessee, and in 1998, relocated their business to a 10,500 square-foot commercial building in Lynchburg, Tennessee.
On December 22, 2000, Ms. Kerce filed for divorce on the grounds of adultery and inappropriate marital conduct, with Mr. Kerce stipulating to the adultery allegations. Both parties retained experts to valuate their business for property distribution.
At trial, Ms. Kerce presented expert Don Carpenter, CPA. Mr. Carpenter testified that he investigated the space rented by IBIS, the nature of the German textbook distributor business, the responsibilities and market significance of Ms. Kerce’s unique contributions to the business, the significant contributions of Mr. Kerce in the computerization of the business, in addition to the salaries to be paid to the parties by the business as part of its ongoing liabilities.
Mr. Carpenter determined the market value of IBIS to be $90,000.00 based on the company’s stream of earnings, discounting the value of uncollectible debt and obsolete inventory and attempting to account for the particular risks related to the German textbook business, including the need for continued contributions of expertise equal to those made by the parties, increased competition and changes ongoing in the market for German books.
Mr. Kerce offered expert Gregory Luna, CPA who admitted that he had not personally viewed the business location and he was not aware of the intricacies of the German book distributing business. He testified to using the Delaware block method of business valuation. The Delaware block method focuses on the market value of the company, the value of the assets and the value of the earning stream of the business based on history.
Applying the Delaware block method approach, since IBIS was a closely held corporation, the stock was not traded, resulting in a market value of zero. To determine the value of the company’s assets, Mr. Luna took the balance sheet numbers from December 2000 and made the necessary adjustments to conform to general accepted accounting principles. His evaluation extended the earnings of the business over five years, extended the loss of obsolete inventory over eight years and its estimated 15% pre-tax return on the business, to come to a $1,013,028 valuation of IBIS.
The Trial Court did not fully accept the expert valuation of either party and determined the value of IBIS to be $220,000. Mr. Kerce appealed the decision of the Trial Court, contending that the court erred in its valuation and distribution of the marital estate. The Tennessee Court of Appeals affirmed the Trial Court’s valuation of IBIS. The Court held that given the expert testimony presented to the court and the range of value created by that testimony, the evidence on record did not preponderate against the Trial Court’s assignment of value.
The Court of Appeals noted that while the Delaware block method of business valuation has been adopted by the Tennessee Supreme Court when assessing the fair value of a dissenting shareholder’s shares in a closely held corporation, it is by no means the only acceptable method, and for the purposes of evaluating the entire business as a marital asset, it is not always appropriate.
M2002-01744-COA-R3-CV (Tenn. Ct. App. Aug. 2003).
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.
