Logue v. Logue ( 2022 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
2022-NCCOA-625
No. COA21-485
Filed 20 September 2022
Cumberland County, No. 15 CVD 1837
JASON LOGUE, Plaintiff,
v.
CHESSICA LOGUE and CHESSICA A. LOGUE, DDS, PA, Defendants.
Appeal by defendant from judgment entered 29 July 2020 by Judge A.
Elizabeth Keever in Cumberland County District Court. Heard in the Court of
Appeals 9 March 2022.
Wyrick Robbins Yates & Ponton LLP, by Charles W. Clanton and K. Edward
Greene, for plaintiff-appellee.
Smith Debnam Narron Drake Saintsing & Myers, L.L.P., by Alicia Jurney, for
defendant-appellant.
DIETZ, Judge.
¶1 This family law appeal concerns the valuation of a dental practice. Business
valuation always is a fraught undertaking, and particularly so for a small
professional business like the one in this case. By far, the greatest value-adding
component of this business is its human capital—the skill and reputation of the
dentists who draw paying customers to the business. This component typically is
reflected on a balance sheet as part of the intangible asset known as goodwill.
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2022-NCCOA-625
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¶2 Here, the trial court used a rudimentary but accepted method of valuation: it
examined the market value of Defendant’s stake in the business based on an arms-
length transaction two years before the parties separated—a transaction that
involved a valuation of the business and calculation of goodwill by outside experts.
The court then determined that there were no changes to the business that might
substantially alter that market valuation (and corresponding goodwill calculation) in
the intervening two years.
¶3 On appeal, Defendant challenges this valuation of the business. She contends
that the trial court’s chosen method of valuation is unreliable and that the court
wrongly calculated the business’s goodwill without the benefit of expert testimony.
¶4 We reject these arguments. As explained below, the trial court used a reliable
method of valuation. To be sure, the market-value approach used by the court has
flaws. But the parties did not present the court with evidence or expert testimony
that would have permitted the court to incorporate additional methodology into its
analysis. Moreover, although expert testimony ordinarily is necessary for a court to
calculate goodwill in the first instance, the court here did not calculate goodwill in
the first instance. Instead, the court examined the market value of the business in an
arms-length sale transaction (which included a goodwill calculation done by outside
experts) and then found that there were no changes to the business in the interim
that might have substantially impacted that market value. We therefore hold that
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the trial court’s findings, and its valuation methodology, were appropriate, and we
affirm the trial court’s judgment.
Facts and Procedural History
¶5 Plaintiff Jason Logue and Defendant Chessica Logue married in 2004,
separated in 2015, and divorced in 2016. As part of the separation and divorce, the
parties sought equitable distribution of their marital assets. Among those assets is
Chessica Logue’s stake in her dental practice known as Chessica A. Logue, DDS, PA.
¶6 The trial court entered its first equitable distribution judgment in 2018. As
part of the trial court’s equitable distribution judgment, the court valued the dental
practice. Defendant appealed that valuation, arguing that the trial court’s findings
were insufficient to support the court’s valuation.
¶7 In 2020, this Court vacated the trial court’s order and remanded for additional
findings and a revised valuation determination. Logue v. Logue, 270 N.C. App. 820,
839 S.E.2d 873, 2020 WL 1683094 (2020) (unpublished) (Logue I). We held that the
trial court properly classified the dental practice as marital property but that the
court did not make sufficient findings of fact to support the valuation of the business
at the date of separation. Id. at *5. Our holding turned largely on the absence of
findings that identified the valuation methodology that the trial court employed in
its analysis:
At the hearing, neither party provided appraisals of the
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Opinion of the Court
value of Logue P.A. at the time of separation. Although
both parties testified about the appraisal and three pro
formas created in 2012, and their respective tax returns
since 2014, both parties presented conflicting evidence as
to what the value of Logue P.A. was at the time of
separation and what they relied on in making their
determinations. Even if the trial court relied on the
information provided in those documents, the trial court’s
findings do not specify what values were relied on from
those documents.
...
The court did not make findings explaining how the value
of the assets included in the purchase price of [the seller’s]
interest had varied between the 2012 purchase price and
the 2015 date of separation. Thus, we are unable to
determine how the trial court arrived at the value of
$219,565.00.
Id. at *5–6. We remanded this case with instructions to conduct a new valuation of
the business using “specific and clear methodology.” Id.
¶8 On remand, the trial court held a hearing and then filed a second equitable
distribution judgment. In this judgment, the trial court provided a more detailed
explanation of its valuation analysis, which we quote here for context during our
analysis:
When wife joined Hedgecoe Dentistry in 2009, it was with
the hope that she would eventually be able to buy into the
practice. The practice enjoys an excellent reputation within
the Fayetteville community. The practice was owned by a
father (Joel Hedgecoe) and son (David Hedgecoe) and the
father was considering selling his share and gradually
retiring. In 2012, discussions began about the purchase of
the father’s 50% interest in the partnership. In preparation
for negotiations on the sale price, the practice was
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appraised by Roger K. Hall & Company, Inc. of Charlotte.
The practice was subsequently reappraised by the same
company and husband and wife hired a second firm in
Raleigh to review the appraisal. Husband and wife met
with the appraisers in Charlotte and with Brent Sumner of
McFadyen and Sumner, CPAs of Fayetteville. McFadyen
Sumner was used by the couple to prepare their taxes and
for other accounting work. As part of the evaluation, the
company prepared a document anticipating potential
future income of wife, the son, and the father from the
practice.
Ultimately, the Hedgecoes and the Logues agreed to a price
and wife created an S Corporation (Chessica Logue, DDS,
PA) for the actual purchase. Wife is the 100% owner of the
S Corporation. The purchase price based on the appraisal
was $1,249,800.00 and was completely financed.
...
Joel Hedgecoe continued to work in the practice after the
sale and was paid by the practice as an associate. He
continued to work past the time originally contemplated
when the sale was consummated so that wife developed her
own patients rather than taking over many of his. As of
August 2018, he had slowed considerably and only worked
on Mondays and Tuesdays.
No evidence was presented as to his current status in the
practice. Despite Joel Hedgecoe continuing past the
anticipated date, wife is receiving income from the practice
generally as anticipated.
...
McFadyen Sumner, the CPA firm that prepared the taxes
for the S Corporation and for the parties, provided as part
of the tax documents introduced as Plaintiff’s Exhibit 20 a
listing of the assets of the corporation. From 2013 through
2017, the asset statement continued to list goodwill of
$1,018,800.00. The court finds this to be reasonable
considering that Dr. Joel Hedgecoe continued to work as
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previously, and wife continued to develop her own clientele.
Persons looking at the practice would not see any change
that might impact the goodwill. As of December 31, 2014,
the other assets of the business had the following values as
listed on the asset sheet – equipment and furniture at
$186,848.00, restrictive covenants at $10,000.00 and
patient files at $10,000.00. The Court finds the value of the
S Corporation on the date of separation to be $1,225,648.00
(goodwill, equipment and furniture, restrictive covenants,
and patient files) less $1,030,253.00 (the balances payable
on the 3 debts as of the date of separation) for a value of
$195,395.00.
¶9 The trial court then applied this valuation of the business in its determination
of the appropriate distributive award in its judgment. Defendant again appealed.
Analysis
¶ 10 Defendant appeals the trial court’s latest equitable distribution judgment,
arguing that, on remand, the court again failed to apply reliable methodology to value
the dental practice.
¶ 11 There is “no single best approach to valuing an interest in a professional
partnership” and “various appraisal methods can and have been used to value such
interests.” Poore v. Poore, 75 N.C. App. 414, 419, 331 S.E.2d 266, 270 (1985). “The
task of a reviewing court on appeal is to determine whether the approach used by the
trial court reasonably approximated the net value of the partnership interest.” Id.¶ 12 To ensure meaningful appellate review of this valuation analysis, the trial
court “should make specific findings regarding the value of a spouse’s professional
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practice” and “should clearly indicate the evidence on which its valuations are based,
preferably noting the valuation method or methods on which it relied.” Id. at 422, 331
S.E.2d at 272.
¶ 13 There are many possible approaches to valuation, all of which carry risks of
over- or under-valuing the business. These approaches range from simply examining
the balance sheet of the business and calculating its book value (by subtracting
liabilities from assets), to complicated forecasting techniques that examine
discounted cash flows and enterprise value using projections for growth and the
expected life of the business.
¶ 14 One acceptable valuation approach is to assess the market value of a stake in
a closely-held business by examining the fair market value paid for that stake in a
recent arms-length transaction—in other words, “the price that a willing buyer would
pay to a willing seller for it.” See id. at 421, 331 S.E.2d at 271.
¶ 15 The trial court used this approach. The court first examined the price
Defendant paid for her stake in the dental practice approximately two years before
the date of separation and explained why this was an arms-length transaction that
involved a valuation by outside experts. The court then examined the state of the
business in the intervening time period, including examination of the balance sheet,
tax records, and evidence about the progress in transitioning the most experienced
dentist out of full-time practice.
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¶ 16 This last factor is particularly important because the largest recorded asset of
the practice, by far, is the intangible asset known as goodwill. That goodwill is largely
a reflection of the practice’s human capital and, specifically, the reputation of Dr. Joel
Hedgecoe, the most senior dentist at the practice, whose skills helped the business
cultivate an “excellent reputation within the Fayetteville community” over the years.
The court examined whether this goodwill figure may have changed and found no
evidence that it had: “the asset statement continued to list goodwill of $1,018,800.00.
The court finds this to be reasonable considering that Dr. Joel Hedgecoe continued to
work as previously, and wife continued to develop her own clientele. Persons looking
at the practice would not see any change that might impact the goodwill.”
¶ 17 Accordingly, we hold that the trial court’s methodology—employing a market-
value approach based on a recent arms-length transaction and then examining
whether any changes in the intervening period likely impacted that market value in
a significant way—is an acceptable, reliable method of valuation. We therefore reject
Defendant’s argument that the trial court failed, in its second attempt at valuation,
to use a reliable method of valuation that reasonably approximates the value of
Defendant’s stake in the business.
¶ 18 Defendant also contends that, even if the overall methodology is reliable, the
trial court erred because it considered the goodwill of the business without the benefit
of expert testimony. In Poore, this Court held that “the existence and value of goodwill
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is a question of fact” and that it “should be made with the aid of expert testimony.”
75 N.C. App. at 421, 331 S.E.2d at 271. But this statement concerned a trial court
that was calculating goodwill in the first instance—that is, a court examining a
business’s goodwill without the benefit of recent calculations of that goodwill by
outside valuation experts. Id. In that scenario, the court is engaging in a valuation
methodology typically referred to as book value or balance sheet value. This involves
the court assessing the assets and liabilities of the practice, subtracting liabilities
from assets, and arriving at a net value for that practice.
¶ 19 Here, the trial court used a different methodology. As described above, the
court employed a market-value approach based on a recent arms-length transaction.
In that approach, when the evidence in the record demonstrates that there were no
substantial changes at the practice that could have impacted the goodwill calculation,
the court appropriately can find that the goodwill calculation established in that
earlier transaction remains applicable in the current valuation, without the need for
additional expert testimony.
¶ 20 We conclude by re-emphasizing that “there is no single best approach to
valuing a professional association or practice, and various approaches or valuation
methods can and have been used.” Id. at 419, 331 S.E.2d at 270. Valuation is
complicated, and those with the skills to do it effectively can demand a high price for
their services. Thus, in many family law proceedings, if the parties had unlimited
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resources, they could offer sophisticated valuation evidence, including testimony from
experts that would permit the court to examine a range of valuation methodologies,
take them all into account, and arrive at an accurate, highly defensible value for the
business.
¶ 21 But parties in family law proceedings do not have unlimited resources. What
trial courts more frequently encounter are records containing quite limited evidence
and testimony from which to value a business. Nevertheless, when equitable
distribution is sought, the trial court must “determine the net fair market value of
the property based on the evidence offered by the parties.” Quesinberry v.
Quesinberry, 210 N.C. App. 578, 585, 709 S.E.2d 367, 373 (2011).
¶ 22 In this case, the market-value approach employed by the trial court admittedly
is a rudimentary one. But it was sufficiently reliable to reasonably approximate the
value of Defendant’s stake in the business, particularly in light of both parties’ choice
not to retain experts and provide additional evidence and testimony that would
permit the court to engage in more sophisticated valuation methodology. We therefore
affirm the trial court.
Conclusion
¶ 23 We affirm the trial court’s judgment.
AFFIRMED.
Judges TYSON and COLLINS concur.