Car Dealer Valuation Can’t Be Based on Buy-Out Value in Contract
Tennessee alimony divorce case summary after 17 years married.
Kimberley Arnold Bates v. Charles Anthony Bates
Comments from Robert Vance, CPA, ABV, CFF, CVA, CFP about this case:
The Bates case does not break any new ground, but does support several very basic principles of business valuation of a closely-held company in a Tennessee divorce. The court of appeals affirmed that a spouse will not be held absolutely to a buy-sell contract the spouse did not sign (as in Harmon), and that a 20% Discount for Lack of Control and a 20% Discount for Lack of Marketability are not unreasonable for a minority interest in a closely-held business.
See Mr. Vance’s summary of this case at his site: Bates v. Bates – TN Case Supports Many Basic Business Valuation Principles
Our case summary:
The wife in this Wilson County, Tennessee, case filed for divorce after 17 years of marriage. The couple had been married and divorced once before, but remarried in 2001. The main issue at trial was the classification and valuation of the husband’s interest in a car dealership.
In 1994, during the first marriage, the husband became sales manager of the Ford-Subaru dealer and acquired a 20% interest in the company. At the time of acquisition, his interest was worth $800,000. The stock agreement provided that if the husband were ever terminated for cause, the stock would be bought back for at that same price.
At the time of the 1997 divorce, the parties entered into a marital dissolution agreement granting the husband the dealership stock. In 1997, the husband purchased another $800,000 interest in the company.
At issue in the case was the value of the husband’s share as of the 2001 remarriage. Both parties had expert witnesses testify.
The wife’s expert witness was Scott Womack, who used two different methods to come up with values. First, he used the company’s income, assets, and fair market value to calculate that the company was worth $2.12 million in 2001. After discounting for lack of marketability and lack of control, he set the value of the husband’s 20% interest at $255,000 as of 2001. His other method was the termination agreement, and he arrived at a value of $100,000, the maximum amount the husband could sell his stock for in 2001.
At the time of trial, he testified that the value was based upon the blended book value and the value of the goodwill. Under this method, he set the value of the company at over $3.6 million, not including some receivables.
The husband’s expert witness on valuation was Dr. Mark Schmitz. He agreed that the total value of the company in 2001 was $2.12 million. But since the agreement capped the other owner’s interest at $800,000, Schmitz testified that the remaining value of the company, $1.32 million, belonged to the husband as accrued equity.
At time of trial, Schmitz pegged the value of the company at $3.09 million. He used a similar method as Womack, but used non-depreciated values of certain assets.
At the time of trial, the wife was 50 years old with no formal post-secondary education. During the marriage, she had rarely worked outside the home. She believed that her maximum earning capacity was $25,000.
Trial was held before Judge Clara W. Byrd. She held that the husband’s separate interest in the company had a value of $100,000. This value was based upon the termination provision of the agreement. The trial court sided with the wife’s expert on the overall value of the company and set it at $3.4 million. After subtracting the husband’s $100,000 share, she set the marital asset at $3.3 million and ordered it split 50-50. Overall, each party was to receive $2.3 million in marital assets.
The trial court also ordered the husband to pay alimony in futuro in the amount of $3,000.00 per month. The husband then appealed to the Tennessee Court of Appeals.
The appeals court first had to tackle the value of the husband’s interest in the company in 2001, since this pre-existing interest was the husband’s separate property. The trial court had set this sum at $100,000, since the contract called for that amount. But the husband pointed out that this figure would come into play only if he were terminated for cause, which never happened. The appeals court, citing a 2000 case, agreed with the husband. Under those circumstances, the amount cited in the agreement was not controlling as to the value.
Instead, the court looked to the testimony of the wife’s expert and agreed that his alternate valuation of $255,000 was the result of the correct factors. The appeals court noted that valuation of a closely held corporation is not an exact science, but that the value of $255,000 had considered the correct principles. Therefore, it increased the amount of husband’s separate interest in the company to this amount.
The appeals court then turned to the appreciation of this asset during the marriage. On this issue, the appeals court agreed with the trial court. The husband argued that he had a continuing blocking right which should have been included in the value. But the appeals court held that only the $225,000 initial interest was a separate asset.
The appeals court went on to vacate the remainder of the property distribution, since it held that the trial court had not properly considered the almost million dollars in shareholder receivables. For this reason, the court also sent the case back for another look at the issue of alimony.
No. M2019-00606-COA-R3-CV (Tenn. Ct. App. July 9, 2020).
See original opinion for exact language. Legal citations omitted.
To learn more, see Alimony Law in Tennessee.
