Business Valuation and Goodwill Examined in Clarksville, Tennessee Divorce: Cela v. Cela

August 4, 2021 K.O. Herston 0 Comments

Facts: Husband and Wife divorced after 14 years of marriage.

Wife is the sole owner of her speech therapy practice, a marital asset subject to equitable division.

The parties’ business valuation experts testified to conflicting views about how to determine the practice’s fair market value. Although they agreed there are three primary approaches to valuation—the asset approach, the income approach, and the market approach—each selected a different method.

The dispute concerned how much business goodwill the practice has.

Wife’s expert testified that the practice’s goodwill was almost entirely comprised of Wife’s personal goodwill because the company, as a health care practice, is a sole proprietorship, its employees do not have noncompete agreements, there is little repeat business, and its operations continued unhindered after the practice changed its name following a trademark dispute.

Wife’s expert determined the net asset approach to be appropriate and valued the practice at $82,000.

Husband’s expert felt the income approach was appropriate because the practice is a “true business” and not a “classic” sole proprietorship. He emphasized the business carried on successfully during Wife’s two-month absence, and Wife does not go to the practice’s second location. He noted that Wife was responsible for only 14.3% of the practice’s income, with the remainder being created by other employees. He concluded “the reason why [customers come to the practice] is the business itself, the enterprise, the name of the business, the assembled workforce, [and] the systems that have been put in place.” He said Wife established a business model that leverages others’ skills and services such that the practice is not reliant on any single service provider.

Using the income approach, Husband’s expert valued the practice at $790,000.

The trial court accepted the value of $790,000 from Husband’s expert but determined that a 14.3% reduction was appropriate to account for Wife’s personal goodwill. Thus, the value was $677,030.

Wife appealed.

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

Tennessee courts must place a reasonable value on each piece of marital property subject to division. When presented with conflicting evidence of value, the trial court may select a value within the range of values presented by the valuation evidence.

Valuation evidence is inherently subjective. Thus, a trial court’s valuation decision need not coincide precisely with the valuation opinions offered into evidence.

When a business is part of the marital estate, Tennessee courts recognize that the personal goodwill of one spouse in the business cannot be divided among the parties. This is because it is unfair to force one spouse to pay the other for an intangible asset at a judicially determined value when that value is incapable of being realized by a sale.

The Court found no abuse of discretion in the trial court’s reasoning:

The fair market value the trial court placed on the practice—$677,030—is within the range of the valuation evidence presented by [the experts]. The trial court discounted by 14.3% (or $112,970) the $790,000 value given by [Husband’s expert] to account for the company’s revenue personally generated by Wife as her personal goodwill in the company. The trial court decision to use a value generated by the income approach is supported by [Husband’s expert’s] testimony and the facts in the record concerning [the practice] operating as a true business with enterprise goodwill. So was the trial court’s decision to discount that value by the amount of revenue personally generated by Wife. Under these circumstances, we will not second-guess the trial court’s determination of the company’s value.

The trial court’s valuation of Wife’s speech therapy practice was affirmed.

Cela v. Cela (Tennessee Court of Appeals, Middle Section, July 30, 2021).

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Business Valuation and Goodwill Examined in Clarksville, Tennessee Divorce: Cela v. Cela was last modified: July 31st, 2021 by K.O. Herston

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