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We Mean Business: Valuation of Businesses for Equitable Distribution

By: Hannah E. Smith, JD

Logue v. Logue, No. COA19-831 (unpublished opinion)

One of the most important issues dealt with by experienced family law and divorce attorneys across the country, and especially in the Piedmont Triad, is the division of property (also known as equitable distribution). When there are shared business interests, the valuation of the business(es) adds another layer of complexity. Read on to see how the date of separation, a ‘fact’ on which the parties are not always in agreement, can greatly affect the dollar amounts in property division.

Facts: Plaintiff Husband and Defendant Wife married on December 29, 2004. Shortly thereafter, Defendant Wife graduated from dental school and went on to complete a one-year residency program before accepting a position as a dental associate at Hedgecoe Dentistry in Fayetteville, North Carolina. Defendant Wife formed an S corporation called Chessica A. Logue, DDS, PA (“Logue P.A.”). In December 2012, Logue P.A. purchased a 50% interest in Hedgecoe Dentistry for $1,249,800.00. Plaintiff Husband and Defendant Wife separated on February 28, 2015, and subsequently divorced on July 14, 2016. Plaintiff Husband filed claims for equitable distribution, post-separation support, and alimony against Defendant Wife. As a component of Plaintiff Husband’s equitable distribution claim, Plaintiff Husband sought to have Logue P.A. classified as marital and valued by the court for distribution. The trial court classified Logue P.A. as marital and divisible and assigned it a date of separation value of $219,565.00. As a result, the trial court determined Plaintiff Husband was entitled to a distributive award from Defendant Wife in the amount of $181,600.00.

Issue: Did the trial court err in its valuation of Logue P.A., thereby failing to achieve an equal division of the parties’ marital property?

Holding: Yes.

Rationale: Pursuant to N.C. Gen. Stat. § 50-20, the court shall equitably distribute property that qualifies as marital and divisible between the parties. Furthermore, the court shall value property that qualifies as marital and divisible as of the date of the parties’ separation. The trial court correctly classified Logue P.A. as marital property but erred in assigning its date of separation value of $219,565.00. Valuing marital interest in a business can be difficult and should be done on a case-by-case basis. The court “should make specific findings regarding the value of a spouse’s professional practice and the existence and value of its goodwill and should clearly indicate the evidence on which its valuations are based, preferably noting the valuation method or methods on which it relied.” Poore v. Poore, 75 N.C. App. 422, 331 S.E.2d 272 (1985). Here, the court assigned Logue P.A. a date of separation value of $219,565.00 but did not make specific findings regarding this value and completely neglected to indicate the evidence considered to arrive at this value. It appears that the $219,565.00 value included the purchase price of the 50% interest in Hedgecoe Dentistry, less debt. However, Defendant Wife purchased the 50% interest in Hedgecoe Dentistry in 2012, and the parties later separated in 2015. The trial court did not explicitly explain how the value of Logue P.A.’s assets could have fluctuated between 2012 and 2015. Therefore, the appellate court remanded the trial court’s decision regarding the original valuation of Logue P.A. for the trial court to revalue Logue P.A. on the parties’ date of separation using a specific and clear methodology.

Evidentiary Issue: McGill and Hill Group prepared three pro forma financial estimates for Logue P.A. while Logue P.A. was deciding whether to purchase the 50% interest in Hedgecoe Dentistry for $1,249,800.00. Defendant Wife objected to the entry of the pro forma financial estimates into evidence by stating the estimates were hearsay under Rules 801 and 802 of the North Carolina Rules of Evidence. The trial court overruled Defendant Wife’s objection and allowed the pro forma financial estimates into evidence. “‘Hearsay’ is a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted.” N.C. Gen. Stat. § 8C-1, Rule 801(a), (c) (2019). Hearsay is generally inadmissible; however, certain exceptions apply. North Carolina recognizes an “admission by a party opponent” as an exception to hearsay pursuant to Rule 801(d). The trial court determined Defendant Wife relied on the three pro forma financial estimates in deciding whether to purchase the 50% interest in Hedgecoe Dentistry. As a result, her reliance indicated that she believed the statements made within the estimates to be true, and therefore, such action demonstrated an implied adoptive admission.

Key Takeaways: When a business qualifies as marital and divisible property, this adds a layer of complexity to equitable distribution. If a business is involved in your marital estate, you must exercise due diligence to accurately ascertain the value of the business as of the date of separation. This valuation will significantly aid the court in assigning an appropriate value to the business. While many methods exist for assessing the value of a business, accounting for goodwill, restrictive covenants, equipment, furniture, etc. are all relevant factors to consider. Moreover, be cautious of the work product produced during the valuation. Such documents may be entered into evidence if the court determines you have relied on those documents for decision purposes, thereby demonstrating an implied adoptive admission.