Commerical Painting Business Valued at $200K in TN Divorce

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

Koch v. Koch – Tennessee Divorce Business Valuation – Commercial Painting Sole Proprietorship

How should a sole proprietorship be valued for the purposes of property distribution upon divorce?

The physical assets and accounts receivable have ascertainable value. However, a sole proprietorship, like a professional practice, is dependent upon the reputation and professional good will of the owner and is valuable to its individual owner to the extent that it assures continued substantial earnings in the future.  Therefore, professional goodwill cannot be separately sold, and Tennessee Courts do not consider it to be a marital asset subject to equitable distribution.

The Tennessee Court of Appeals case Koch v. Koch exemplifies the issues related to valuation of a sole proprietorship business in a divorce.

Patsy and Mark Koch were married on September 16, 1977.  During their fifteen year marriage, the couple had two children, Matthew, born May 23, 1985, and Rachel, born May 29, 1990.

Ms. Koch graduated from college in 1980 with a Bachelors Degree in Special Education, and was fifteen credit hours shy of completing her Masters Degree.  Ms. Koch taught in the Memphis City School system from 1980 until her first child Matthew was born in 1985, and then returned to teaching from August of 1986 until January of 1988.

Mr. Koch graduated from college in 1980 with a Bachelors Degree in Engineering Technology. After graduating college he purchased an interest in a small corporation with a $10,000 loan from his mother. The corporation went out of business in December of 1988, at which time Mr. Koch assumed some of the corporation’s liabilities and work in progress, and began doing business as a sole proprietorship under the name of Commercial Painting Company.

However, the Koch marriage was a stormy one, with four separations.  The couple’s final separation resulted in Ms. Koch filing for divorce on March 29, 1990 while seven months pregnant with the couple’s second child.

On June 16, 1992, the Trial Court granted the divorce but reserving the issue of economic matters for future determination.  On January 11, 1993, the Court entered a final decree on property distribution which Mr. Koch appealed.  Among the numerous contested issues on appeal was whether the evidence preponderated against the Trial Court’s finding as to the value of Mr. Koch’s business at $200,000.00.

The parties agreed that Mr. Koch’s business was a marital asset, but had not come to an agreement regarding the value of the business.  Mr. Koch retained his CPA Mr. Stallings as his trial expert who testified that the value of Commercial Painting Company in 1990 was $177,160.00, a figure which did not take into account Mr. Koch’s individual income tax liability.  Mr. Koch testified that in his opinion, the value of his business was $105,000.00.

Upon review, The Tennessee Court of Appeals affirmed the Trial Court’s business valuation. The Court noted that the business property consisted of vehicles, painting equipment, inventory, accounts receivable, and certificates of deposit. The monthly balance sheets of the business from December 1990 through May 1991 showed a net asset value in excess of $300,000.00.   There was evidence in the record that the value of Mr. Koch’s business had a range from $105,000.00 according to Mr. Koch’s testimony, to in excess of $300,000.00 according to the monthly balance sheets.  Consequently, the Trial Court’s value of $200,000.00 was within the range of competent evidence submitted.

874 S.W.2d 571 (Tenn. Ct. App. Oct. 1993).

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.