Chemical Treatment Business Valued in TN Divorce
Tennessee law case summary on business valuation in divorce and family law from the Court of Appeals.
Bonny Browne v. Alexander Lee Browne, Jr. – Tennessee divorce business valuation & alimony 18 years married
The husband and wife in this Tennessee divorce case were married in 1994 and had two children at the time of their divorce, a daughter aged 13 and a son aged 7. At the time of their divorce, the husband was 47, the wife was 40, and both were in good physical and mental health.
The husband was the president of Browne Laboratories, Inc., a chemical treatment company. He had a 44.837% ownership interest in the company, and his business partner had an approximately equal interest. The husband’s father owned the remaining interest. For the year before trial, the husband had a base income of over $300,000. The husband also had two other business interests. He was a 50% partner in South Creek, LLC, the company that owned the property on which Browne Labs was located. His 2011 income from that business was about $37,000. He was also partner in a third business, Ice Baby, LLC, an ice machine business, and his 2011 income from that business was about $3800.
The wife had a teaching degree, but not a teaching license, and had not worked outside the home since the birth of the children. The wife filed for divorce in 2010, alleging irreconcilable differences and inappropriate marital conduct. She alleged that the husband had physically and verbally abused her, and she obtained a temporary restraining order against the husband. The husband also alleged inappropriate marital conduct, and sought to be named as the primary residential parent.
After a number of continuances, trial was held in 2012, and in 2013, the trial court issued its order. It granted both parties a divorce, and then decided the various property issues. The trial court ordered the husband to pay $6,500 per month in rehabilitative alimony for five years, and set child support at $2,723 per month. The wife appealed to the Tennessee Court of Appeals, alleging that the trial court had made errors in the valuation of the businesses. The appeals court first looked at the valuation of Browne Labs.
The wife argued that the lower court had used the wrong capitalization rate, and pointed to the testimony of her expert witness, Shannon Welsh Farr of Decosimo Advisory Services. The husband’s expert had been Randall Benjamin Herbert of Henderson Hutcherson & McCullough, PLLC. Mr. Herbert had analyzed the cash flow of the business, and the wife argued that the trial court should have applied a different capitalization rate. Mr. Herbert had also applied a minority interest discount, and wife argued that this was not appropriate, given that it did not take into account the stock option price actually paid by the husband.
Ms. Farr valued the husband’s interest at over $860,000, but Mr. Herbert had valued it at only $146,000. After considering all of the evidence, the trial court had set the value at $277,000.
The appeals court agreed with the husband that the trial court’s ruling was within the range of values shown by the evidence, and that the trial court had acted properly in setting the value as it did.
In so holding, the appeals court held that the lower court had properly applied the “Delaware Rule,” of discounting the value of dissenting minority shares of a closely held company.
The appeals court carefully considered the evidence offered by both of the experts and concluded that the trial court had acted properly. It then turned to the valuation of South Creek, LLC. The trial court had set the husband’s interest at $66,000. The lower court had made this determination based upon the equity in the real property owned by the company. But the wife argued that the valuation didn’t take into account other assets of the company, including a note receivable from Browne Labs in the amount of $134,000, and two vehicles.
The court agreed with respect to the note. It pointed out that the husband had treated this as a liability of Browne Labs, the debtor company, but failed to account for it as an asset of the creditor company. The appeals court held that this was error, and that half the value of this note should be added to the husband’s ownership interest. The appeals court also agreed that the value of the vehicles should have been taken into account.
Finally, the court turned to the value of the ice company. The trial court had set this business as having a negative value of over $91,000. The appeals court agreed with the valuation, but found that it should have been cut in half, since the husband had only a 50% ownership interest.
The court then looked at the overall distribution of the marital estate, and generally agreed with the trial court’s approach.
Finally, the wife argued that the rehabilitative alimony should run for seven years rather than five. The trial court had initially set this at seven years, but reduced it before final judgment. The court made this reduction after noting that the wife had failed to make progress toward her own rehabilitation during the three years the case was pending. The appeals court agreed that this was an appropriate factor, and concluded that the lower court had acted within its discretion in making this reduction.
Finally, the appeals court examined the alimony award and attorney fee rulings. It affirmed the lower court’s ruling, as modified by its other rulings.
No. E2013-01706-COA-R3-CV (Tenn. Ct. App. Aug. 27, 2014).
See original opinion for exact language. Legal citations omitted.
To learn more, see Business Valuation.
