Valuing a Business in Alabama

Divorcing spouses who own businesses are fond of saying something like, “well there’s two trucks, three desks, a computer, and a bunch of buckets.” I guess it’s worth $_______,” offering some ridiculously low-ball value as the portion that should be shared in divorce. Now a trial court has accepted that theory in valuing a restaurant business, and the appeals court has said “no way.”

Perhaps you’ve had the pleasure of eating the fried catfish at Swamp John’s in Red Bay. I haven’t, so if you have, you’ll have to tell us about it. What I can tell you is that Swamp John’s seems to be a successful business and that its proprietor is probably going to be sharing a little more of its value with his ex-wife now.

The case is Shewbart v. Shewbart, Case No. 2071102 (Ala. Civ. App. March 27, 2009). The trial court divorced the proprietor, Mr. Shewbart, from his wife in July of 2008. The court granted the parties joint legal and physical custody of their 17 year old daughter and ordered that neither party would pay child support to the other, even though Dad was the only breadwinner and Mom had testified she was unable to work because of her many medical conditions. The appeals court affirmed this, noting that Alabama Rule of Judicial Administration 32 specifies the computation of child support for split custody but not for shared custody, so the court was within its discretion in awarding no child support.

You may quarrel with the seeming injustice of the appeals court’s leaving be an award of no child support to a mother who hasn’t worked full-time in 15 years and testifies that she cannot now work, but that’s not what this note is about. This note is about the trial court’s decisions on property division and alimony.

The trial court basically accepted the husband’s valuation of his business based on the liquidation value of the assets used in the business. This was a business the husband had himself had valued at $300,000 a few years ago, a business that had average gross sales of $1.3 million per year for the five years leading up to the divorce. The husband testified that the business owned some used cooking equipment and some trailers used for catering, the value of which was $14,000, and the trial court bought it!

In its final judgment of divorce, the trial court valued the business at $14,000 and awarded the wife $7,000 as her share of it. The trial court awarded the wife a portion of some other assets like checking accounts but awarded her no alimony. The wife appealed.

In dealing with the valuation of the business, the appeals court said the value should be the largest of the valuations based on (1) the income approach, (2) the asset approach, and (3) the market approach.

In this case, in valuing the sole proprietorship, the trial court did not take into account any of the income derived from the business. The wife maintains that the trial court should have concluded that, when that income is considered, the business is worth $ 300,000, not $ 14,000. We do not hold that the trial court must accept the wife’s valuation figures, but we do hold that the trial court must assess some value to the business apart from the value of the materials used in the business. Shewbart at 23-24.

Because property division and alimony are to be considered together, the appeals court also instructed the trial court to reconsider the issue of alimony for the wife.