Posted by: koherston | February 6, 2014

Business Valuation Reversed in Cleveland Divorce: Hartline v. Hartline

Facts: The parties divorced after 25 years of marriage. Husband is a dentist who operated a solo practice for over 30 years. Although many issues were raised on appeal, the only one I find noteworthy is the valuation of Husband’s dental practice.

Wife presented the testimony of an expert witness who valued Husband’s dental practice between $468,000 and $500,000 without including the real property. The witness testified in her valuation was based on a “market approach” that was based on production and revenue. In determining the market value of the dental practice, Wife’s expert considered that the purchaser would be “buying a going concern; you are buying something that is already operating. So part of the value is the fact that you have got an in-place, existing, going-concern business.” Wife’s expert testified that her valuation did not depend upon Husband being the person to continue working in the practice.

Husband testified his dental practice should be valued at -$100,000 (that’s right, negative $100,000), which the trial court found lacked credibility.

The trial court valued Husband’s dental practice at $468,000. Husband appealed.

On Appeal: The Court of Appeals reversed the trial court.

Under Tennessee law, professional goodwill is not a marital asset that can be divided in a divorce proceeding. The basic rationale in the cases disallowing goodwill as a component of the marital estate in valuing a professional practice results from the inequity in compelling a professional practitioner to pay a spouse a share of an intangible asset at a judicially determined value that could not be realized by a sale or another method of liquidating value.

There is a fine line, however, between the personal goodwill of a practitioner and the business goodwill of a practitioner’s business, complete with staff, equipment, and a location that could be assumed by another practitioner. As opposed to cases where the professional practice’s value as a going concern and its business reputation is inseparable from the professional reputation of the practitioner, ‘net asset value’ principles do not apply to incorporated professional practices that do not depend solely on the professional reputation of the practitioner.

After reviewing the record, the Court reasoned:

[Wife’s expert] was clearly distinguishing between Husband’s personal goodwill in the community and the goodwill his practice would continue to enjoy with a different practitioner in terms of equipment, staff, location, and established patients. This Court has previously determined that such a distinction may be considered in including business goodwill for valuation where the practitioner has one or more partners or pre-established contracts that could be assumed by another practitioner. However, in a case such as the one at bar, wherein Husband is the sole practitioner of an unincorporated dental practice, whether his business could continue without him is speculative, leading to the conclusion that the goodwill of Husband’s practice should not be considered in valuing said practice. We therefore must reverse the trial court’s valuation of Husband’s dental practice and remand for valuation without consideration of goodwill, regardless of whether that goodwill is associated personally with Husband or with his practice.

Accordingly, the trial court’s judgment was reversed. The case was remanded to the trial court to allow the parties to present additional evidence regarding the value of the dental practice.

Hartline v. Hartline (Tennessee Court of Appeals, Eastern Section, January 13, 2014).

Information provided by K.O. Herston: Knoxville, Tennessee Divorce, Matrimonial and Family Law Attorney.


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