Mabie v. Mabie - 2017 - Alimony Calculations and Business Valuation By Vance
MATTHEW WHEELER MABIE, M.D. v. CARLA JENNINGS MABIE
Direct Appeal from the Circuit Court for Shelby County
No. CT-005633-11 Gina C. Higgins, Judge
No. W2015-01699-COA-R3-CV – Filed January 9, 2017
Primary Considerations: Valuation of a Professional Practice and Proving Alimony Need
I was the business valuation and alimony need expert for Wife in this divorce case. The case contains several choice quotes highlighted below in bold italics.
Husband was a 1/12 owner-physician in a highly successful pulmonary medical practice in Memphis known as Mid-South Pulmonary Specialists (“MSPS”). Wife’s primary role in the family was as a stay-at-home mother. The trial court awarded Wife, among other things, rehabilitative alimony, alimony in futuro, and attorney’s fees. Husband appealed the trial court’s award of alimony which was based in part on my testimony and the detailed Marital Balance Sheet and Alimony Need and Ability to Pay Analysis I produced. Husband also appealed the $586,000 valuation of his interest in MSPS which was my Conclusion of Value. Husband submitted many extraneous arguments to the COA, which it addressed as follows: “[w]e note that Husband’s brief is replete with sub-issues and arguments that are only tangentially related to the issues stated above [the Issues Presented on appeal]. We pass on the offer to crawl down each rabbit hole presented by Husband, and rather we direct our attention to those issues properly before us on appeal.” The COA affirmed the alimony and valuation judgments of the trial court.
Valuation of Husband’s Interest in MSPS
In 2012, MSPS grossed over $15,000,000. The trial court chose to adopt my method and conclusion of value of $586,000. “Nonetheless, on appeal Husband continues to assert that his interest in MSPS is worth a mere $8,500” which was his expert’s opinion of value. In his brief, most of Husband’s argument concerning the value of MSPS can summarized as a contention that “his expert was right, Wife’s expert was wrong, and that should constitute reversible error”.
Husband also argued that the court committed reversible error by not adequately considering the Stock Control Agreement in its valuation of MSPS. In Husband’s brief, it appears that his argument is essentially that the trial court erred in not considering the Agreement as the only factor relevant to the value of MSPS. In Harmon v. Harmon, No. W1998-00841-COA-R3-CV, 2000 WL 286718 (Tenn. Ct. App. Mar. 2, 2000), the Western section of the COA took on a similar issue as a case of first impression in Tennessee. The Husband in Harmon was an owner-physician in a very large medical group known as the Jackson Clinic located in Jackson, TN. In that case, it was confirmed that Wife was not to be held to a buy-sell agreement that contained an artificially-low buyout provision that she did not sign and therefore was not a party.
Husband’s expert explained that, after considering what he deemed to be multiple substantial risks associated with an investment in MSPS, including the possibility of contracts not being renewed, Husband’s interest in MSPS was “virtually unmarketable at the time”. The expert opined that, due to these incredible risks, he had to rely upon what Husband could receive if he terminated from MSPS and cashed in his shares for only $8,500 pursuant to the formula in the mandatory Stock Control Agreement. I testified at length about the capitalizations of earnings method of the income approach being the most applicable to MSPS and ultimately valued Husband’s interest to be $586,000. When asked why I did not agree that Husband’s interest in MSPS was worth only $8,500, I responded “ ‘Well, I think to suggest that someone who can make 700, 800, 900,000 dollars per year progressively, that his ownership interest is only worth 8,000 dollars defies logic.’ [The court continued:] And, as we have stated before, a trial judge, as fact finder, is not required to check his or her common sense at the door when considering evidence. Eberting v. Eberting, No. E2010-02471-COA-R3-CV, 2012 WL 605512, at *20 (Tenn. Ct. App. Feb. 27, 2012).” It so happens that I was also the expert in Eberting, which was heard in Knoxville, Tennessee.
The trial court’s finding of a $586,000 value of a 1/12 interest in a large, multi-physician practice did contain an element of enterprise goodwill. I testified about the “goodwill” value in MSPS at trial just as I did in Eberting. Unfortunately, the term “goodwill” was not specified in the Mabie trial court’s ruling as an element of the $586,000 value although it was presented that way at trial. Accordingly, the COA did not use the term either in specifying that MSPS contained enterprise goodwill which is a missed opportunity in my opinion. A conclusion of value derived from using the capitalization of earnings method of the income approach, by default, contains an element of goodwill if the overall conclusion of value is greater than the adjusted net “hard” assets, which was the case in Mabie and Eberting. Hard assets are often referred to in court cases as cash, accounts receivable and equipment. Mabie now follows the model for professional practices established by York, Witt and Harmon in that practice size and diversification of revenue source, not solely dependent upon the spouse’s direct efforts, can possess goodwill value.
Award of Spousal Support
As to Wife’s need of support and Husband’s ability to pay, Wife was found to be economically disadvantaged and in need of support. Husband had the ability to pay since he had average earnings of $850,000 per year. The trial court awarded Wife rehabilitative alimony of $6,000 per month for three years so she could obtain gainful and meaningful employment recognizing that any earnings she might ever have would be far less than the earnings of Husband. The trial court also awarded Wife alimony in futuro in the amount of $5,000 per month to run concurrently with the rehabilitative alimony after finding that she could not be fully restored to the parties’ standard of living during the marriage. The trial court’s finding was based in part on my detailed analysis. The COA affirmed the trial court’s award of the rehabilitative alimony and alimony in futuro.
The COA stated “[a]t all relevant times, the court had before it ample testimony as to Wife’s needs and expenses. In fact, Mr. Vance made an extremely detailed spreadsheet of Wife’s needs over the remainder of her life expectancy and Husband’s ability to pay.” Wife hired me to produce the Marital Balance Sheet and Alimony Need and Ability to Pay Analysis which is not inexpensive, but certainly can be very useful when attempting to provide evidence of standard of living and one spouse’s support need and the other spouse’s ability to pay. The alimony analysis is based upon both spouses’ projected income, proposed child support, projected personal living expenses, taxes, retirement draws and future income generated from the divided assets. The analysis illustrates a simplified lifetime financial plan for all of the remaining years of each spouse’s life expectancy so the court can understand the impact of a proposed settlement on each spouse’s cash flow and the ability to accumulate wealth as the years pass. See my feature cover article published in the August 2009 Tennessee Bar Journal, Breakin’ Up is Hard to Do for a full explanation of the theory and methodology. Click Here for a PDF of the article.