Appreciation of Business Interests: What is Substantial Contribution in Tennessee Divorce?

Tennessee case summary on property division and business valuation in divorce

Tennessee case summary on property division and business valuation in divorce.

Angela Michelle Cela v. Sokol Cela

The husband and wife in this Montgomery County, Tennessee, case were married in 2002 and had a son and daughter.  The husband was in the military from 1997 until 2018, after which he retired and became a commercial pilot.  The wife was initially a stay-at-home mom, but returned to school in 2004 to study speech pathology.  She received a master’s degree and worked in the field for three years before starting her own practice.

The wife filed for divorce in 2016, and the case was litigated for three years.  By the time of trial, one of the main issues was the value of the wife’s practice.  The wife testified, as did her bookkeeper.

After a break in the trial, the wife offered the expert testimony of Michael Wallace, who was an accountant for 25 years, was accredited in business valuation, and had been an expert witness in other cases.  He testified that the income approach would not be the best measure for valuation, since it considered the overall enterprise value, which included goodwill.  He noted that goodwill was not a proper element of value in the case of a sole practitioner such as the wife, since it amounted to her personal goodwill for the most part.

Instead, he used the net asset approach and set the value of the practice at $82,000.  The evidence did show that the wife had drawn more than $600,000 from the business in just over a year.

The husband’s expert witness was Joshua Hedrick, a financial consultant and analyst.  He had done about 500 business valuations in fields including healthcare.  He treated the company as a healthcare company, and believed that the income approach was appropriate.  He found that the company was not a “classic sole proprietorship” because it marketed under a trade name and performed work as a team, and not just as the wife.  He valued the company at $790,000.

In late 2019, the court entered its final order, deciding issues such as child support.  On the issue of property division, the husband was awarded the residence, since it had been purchased using military benefits.  The husband’s military pension was divided, based upon the amount of service during the marriage.

On the value of the wife’s practice, the court held that the practice was a marital asset.  It agreed with the husband’s expert that the practice was worth $790,000, but discounted this by 14.3% to account for the wife’s personal goodwill.  The court divided this equally by requiring the wife to pay $338,000 as alimony in solido.  After some post-trial motions, the wife appealed to the Tennessee Court of Appeals.  After affirming the division of the military pension, the appeals court turned to the valuation of the wife’s practice.

The Court of Appeals reviewed the evidence and agreed that the trial court had properly followed the approach used by the husband’s expert.  In particular, it pointed to the testimony that the practice was a “true business” which possessed enterprise goodwill, and not just personal goodwill.

For these reasons, the Court of Appeals affirmed the lower court’s valuation of the business.

The appeals court also reviewed the overall property division and held that the lower court had acted properly.

The court did address some additional issues raised by the husband and vacated on some points.  It remanded the case to the lower court for further proceedings.

No.M2019-01861-COA-R3-CV (Tenn. Ct. App. Jul. 30,  2021).

See original opinion for exact language.  Legal citations omitted.

To learn more, see Property Division in Tennessee Divorce.

To learn more, see Business Valuation in Tennessee Divorce.

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