A battle of experts
The husband’s valuation expert was a CPA who represented fourteen McDonald’s franchises and had been involved in the sale of over 125. In his opinion, the partnership’s seven franchises were worth no more than the purchase price paid the year before.
He first calculated the gross value of each franchise by using a multiple of free cash flow—which he testified was standard practice for valuing a McDonald’s franchise. After reaching gross value, he factored in current assets and liabilities to arrive at a total net value for the seven stores of approximately $485,000. Given the partnership’s obligation to rebuild one restaurant and the husband’s obligation to repay his father’s loan, the expert said the marital interest in the partnership actually had a negative value.
The wife presented a CPA who was also a credentialed business appraiser and forensic accountant. Using a capitalization of earnings method, he initially valued the partnership at roughly $3.08 million, excluding debt. Applying cash flow figures supplied by the husband’s expert—and adjusting downward for what he believed to be unnecessary expenses and excess profits—he reached a final value for the husband’s 90% interest of $1.671 million.
To rebut this evidence, the husband presented a CPA and managing partner of a valuation/litigation support firm which specialized in valuing McDonald’s franchises. This expert criticized the opposing party for using a particularly high cap rate to reach a cash flow multiple that was higher than she’d seen for any sale of a McDonald’s. The preferred method, she testified, was a discounted cash flow method (DCF). Although her DCF indicated that the seven franchises had not appreciated beyond the purchase price, the partnership had $493,000 in equity. After applying a 20% discount for lack of marketability and deducting the loan to his father, she valued the husband’s 90% interest at $231,000.
Complicated valuation
Based on the three expert reports, the trial court valued the fast food partnership at $1 million, and the husband’s interest at $900,000. After awarding him the business, it ordered him to pay the wife $450,000 in equal monthly installments over seven years. The husband appealed, claiming the valuation was contrary to the evidence and failed to account for the buy-sell value and the marketability discount.
The appellate court found that a number of factors complicated this valuation, in particular the recent acquisition of the restaurants, their limited earnings history, and the need to rebuild one of the restaurants. The partnership earnings were also skewed by the father’s contributing his management services for free.
“In our view,” the court said, “the preferred method of valuation would be…a capitalization of income approach.” The parties were entitled to de novo review, based on all the evidence. Using parts of each expert’s methodology, the court reached a value of nearly $3.7 million. After adjustments for cash on hand and liabilities—including the obligation to rebuild—the court found a final value of $1.03 million.
Because this value approximated the trial court’s conclusion, its findings were left undisturbed. The appellate court declined to adjust for a marketability discount, because a sale of the husband’s interest was not “necessary or desirable.”
Bertuca v. Bertuca, 2007 Tenn. App. LEXIS 690 (November 14, 2007)
