Business Value of Construction Co. in Divorce Rejected

Tennessee case summary on business valuation in divorce and alimony after 27 years.

Cathy Turnbo Franks v. Ronald Franks

Ronald and Cathy Franks were married in 1986 and separated in 2011.  They had two children who were both over the age of majority at the time of the divorce.  They jointly owned a construction business, and they acquired considerable property during the marriage, including real estate, stock, investment accounts, and a luxury motor home.

The husband testified that the construction business wasn’t going well, since a number of niche markets had disappeared.  In 2011, the firm had profit of about $724,000, and in 2012, the profit was $830,000, although neither of these amounts had been fully collected.  In 2010, the firm had a loss of $1.6 million on a cash basis.  He reported that his income was about $7,200 per month.

After calling the business accountant as a witness, the husband’s position was that the business had a negative value of $218,000.  The trial court believed that the business had a positive value, but since there was no proper evidence as to value, the court simply awarded it to the husband.  In addition to the husband’s reported compensation, the court noted that there were at least $10,000 in payments each month to his account, and he was also able to make personal charges of about $4,500 per month.  The trial court set his income at $16,000 per month.  The wife had requested $5,000 per month alimony in futuro, and the court awarded this amount.  The husband brought a first appeal to the Tennessee Court of Appeals, which held in 2015 that the trial court should have made a specific determination of the value of the business, as well as the motor home.

On remand, the trial court first found that the wife was a more credible witness than the husband, and that it had little confidence in the bookkeeping procedures used by the construction business.  It went on to use the income/profit approach to value the company, and started by averaging the profits of 2011 and 2012.  After doing the computations, it arrived at a value of $358,500.  However, it noted that the overall disposition of the case wouldn’t change, even with a zero value.  The court also valued the motor home at $166,000.  It reset the alimony at $4,000 per month, and also awarded the wife her attorney’s fees.  The husband brought a second appeal.

The appeals court first turned to the value of the business.  It noted that the method of valuation always depends on the circumstances of the particular case.

The appeals court noted that there had been no expert testimony, which would have been particularly useful in this case, since the lower court did not trust the accounting methods or the husband’s testimony.

Unfortunately, the appeals court was unable to determine the exact method used by the lower court in reaching its value.  Because of the lack of evidence explaining the method, the appeals court was unable to determine whether the ruling was supported.  Therefore, it once again vacated the valuation and sent the case back for further proceedings on the valuation.

Similarly, there was insufficient evidence as to how much cash the business had on hand.  Once again, it vacated these findings and sent the case back.  It also set aside the valuation of the motor home.

The lower court had found, in making its alimony ruling, that the wife was unable to secure employment other than waitressing.  However, since she had worked in production jobs in the past, the appeals court found that her future employability had not been adequately addressed.  Therefore, it remanded this finding as well.

Finally, the appeals court found that even the ruling as to the husband’s income and future employability were not sufficiently supported by the evidence.  The trial judge referenced some matters such as statements by the husband’s attorney, but the appeals court noted that these were not proper evidence.

After making rulings on a number of other issues, the appeals court vacated the judgment and once again sent the case back for more complete findings on the contested issues.

No. W2015-01525-COA-R3-CV (Tenn. Ct. App. Feb. 29, 2016).

See original opinion for exact language.  Legal citations omitted.

To learn more, see Business Valuation in Tennessee Divorce.