Metal Fabrication Business Valued at $3 Mil. in TN Divorce

Tennessee business valuation law case summary – Metal Fabricating Business. Tennessee divorce and family law from the Tennessee Court of Appeals.

Wallace v. Wallace – Tennessee Divorce Business Valuation – Metal Fabrication.

Margaret and Lacey Wallace were married in 1953.  Mrs. Wallace was a high school graduate, and Mr. Wallace later graduated from college and law school.  Mrs. Wallace worked to put Mr. Wallace through law school, and then remained a homemaker.  Mr. Wallace practiced law for a time, and then worked as a contract administrator.  In 1975, he incorporated Gil, Inc., a metal fabricating business along with William K. Adams.  They later incorporated a second business, A & W Fabricators, Inc.  They also formed A & W Rentals, a partnership that owned the facilities used by the two corporations.

Mr. Wallace began divorce proceedings in Putnam County in 1982, and Mrs. Wallace filed a counterclaim.  Mr. Wallace eventually admitted that he had committed adultery.  In 1983, the trial court granted the divorce to Mrs. Wallace on the grounds of adultery and inhuman treatment.  The other property was distributed, but the trial court was unable to value the Gil, Inc., stock.  The case was the subject of an earlier appeal to the Tennessee Court of Appeals, and the case was remanded, in part to determine the value of Gil, Inc.

The trial court heard the remanded case in 1986.  The evidence on remand showed that Gil, Inc., was a thriving defense contractor with 91 employees and a backlog of orders between $12 and $15 million.  Its assets increased almost five fold in 1985 to over $3.4 million, and had gross sales in 1985 of over $4.7 million.  Mr. Wallace projected that the total revenues for 1985 would be $7 million.  The gross profit had increased between 1980 and 1985 from approximately $400,000 to over $1.53 million, and the net income after taxes went from about $127,000 in 1980 to over $484,000 for the first half of 1985.

In a pre-trial deposition, Mr. Wallace testified that the company’s market price was between $4 and $5 million and that he would accept $2 million for his share.  The co-owner stated that the cash value was between $3 and $6 million.  The company former comptroller placed the value at between $3 and $3.6 million.

The trial court placed the value of the company at the time of the divorce at $3 million, making Mr. Wallace’s interest worth $1.5 million.  The trial court determined that Mr. Wallace should receive all of the stock, and that he should pay Mrs. Wallace $660,000 for her interest.  The trial court called for this amount to be paid in monthly installments over 15 years.

On the second appeal, Mrs. Wallace argued that the trial court should have used a different date to set the value of the business, and that it had used an improper method to value the business.  The Court of Appeals disagreed and affirmed.

The Court of Appeals first noted that the date of the valuation is within the trial court’s discretion.  The trial court’s use of the date of divorce, rather than the date of separation, was within that area of discretion.

As to the valuation, Mrs. Wallace argued that the trial court erred by not specifically using the “Delaware method” of valuation.  However, the Court of Appeals concluded that since valuation is a fact question, the trial court may consider all relevant evidence.  The Court of Appeals noted that a number of methods may be used:  The market value method; the asset value method; or the earnings value.  Since valuing a closely held business is not an exact science, the exact method to be used is within the trial court’s discretion.  Since the evidence in this case did not preponderate against the trial court’s finding, the Court of Appeals affirmed.

733 S.W.2d 102 (Tenn. Ct. App. 1987).

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.