No Goodwill if Owner Acted as Sales Rep in TN Divorce

Tennessee business valuation law case summary – no personal goodwill included if owner acted only as a sales representative. Tennessee divorce and family law from the Tennessee Court of Appeals.

Brown v. Brown, No. M2004-01573-COA-R3-CV (Tenn. Ct. App., Dec. 14, 2005).

In his appeal of the Browns’ divorce trial, Mr. Brown claimed that the trial court incorrectly made its valuation of his business and the country club membership by setting unreasonably high values on those items.

The Chancery Court (trial court) adopted the wife’s valuation of the parties’ separate and marital property, citing the wife to be a credible witness and awarded her an absolute divorce on the grounds of adultery and inappropriate marital conduct.  In contrast, the trial court found the husband’s testimony was “questionable, based on his answers during cross-examination, and credited Mrs. Brown’s evidence of valuation of the business at $100,000.  Further, Presiding Judge Franks of Williamson County wrote that “good will” was not considered in arriving at the value.

Mrs. Brown’s expert, Clyde Bright, stated that the business was worth approximately $100,000; Mr. Brown’s, Gerald LeCroy, claimed that the value of the business was only $45,000; and Mr. Brown personally thought the business had no value.

The two experts testified at length regarding their methods of valuing the business.  Both experts agreed that the business would be worth around $100,000; however,  Mr. LeCroy discounted that amount due to the company’s debt and what he characterized as a general undercapitalization of the company. LeCroy also did not account for the $48,000 owed to the company by one of the company’s sales rep, because he believed it inappropriate, as that money purportedly could not be collected if McCauley left his employment.  Mr. Bright, on the other hand, counted McCauley’s debt to the company as a receivable, but did not discount the company for being undercapitalized, finding no reason to do so.

Judge Franks in the trial court found Mr. Bright’s valuation credible, valued the business within a range supported by the evidence.  In addition, Mr. Brown argued the trial court’s valuation of the business was in error, as there was no discount for his personal goodwill. Judge Franks specifically stated that the company’s value did not include personal goodwill.  To add insult to injury, neither of the experts testified as to the exact value of the husband’s personal goodwill would be in goodwill of the business—Mr. Bright testified he felt the business could be run without the husband.  Mr. Brown essentially functioned as a sales rep, and he was performing the same job as other sales staff. Mr. Bright, however, did concede that a lot of the income was due to Mr. Brown’s works.

Mr. LeCroy, Mr. Brown’s expert, did state that he was very “hands-on” and involved with the business; it would be hard to separate Mr. Brown’s goodwill from that of the business, but also admitted that he did not know how Mr. Brown’s sales numbers compared to the other sales staff.

Mr. Brown also claimed that the trial court’s value of a country club membership was unnecessarily high. Both parties testified that a membership would sell for $16,000, however, Mr. Brown believed that the value should be discounted for a 25% transfer fee and assessments.  Mr. Brown failed to support this claim.  The trial court did not see any reason to give Mr. Brown a reduced price, and the Court of Appeals agreed.  The judgment was affirmed on the valuation of both the business and the membership to the golf club.

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 Germantown, Tennessee.