Appeal from the Circuit Court of St. Clair County. No. 98-D-516 Honorable Robert J. Hillebrand, Judge, presiding.
The opinion of the court was delivered by: Justice Chapman
Susan Cutler filed an action for dissolution of marriage against her husband of approximately 20 years, David E. Cutler. After a trial, the court entered a judgment on all remaining issues. One issue was the determination of the value of David's business, the Cutler Insurance Agency (Cutler). The court valued the business at $243,000 by applying a form of the "income approach" method of valuation. This figure was then used in determining the equitable distribution of marital property. David now appeals, arguing that (1) the court's valuation of the business was against the manifest weight of the evidence and (2) this error in valuation substantially and materially affected the equitable distribution of marital property. We reverse the decision of the trial court and remand the cause with directions that $32,000 be used as the valuation of the business in the redistribution of marital property between David and Susan.
Susan filed a petition for dissolution on May 20, 1998. She and David had been married since 1979 and had one child. Grounds for the dissolution were found on February 9, 2000. At the trial on October 12, 2000, the witnesses included both of the parties, Charles Tzinberg as Susan's valuation expert, and Frank J. Reedy, Jr., as David's valuation expert. David also offered the evidence depositions of Larry McKenzie and Richard G. Eitzel, both of whom were former owners of insurance agencies tied to Geico Insurance Company (Geico).
Susan testified that she was 44 years old and worked as a regional account manager with Roche Labs. She has a bachelor of science degree in nursing. In 2000, she was expected to make approximately $97,000, which was consistent with her recent past earnings.
David testified that he was 48 years old and was employed by Cutler, earning a gross income of slightly more than $5,000 per month. The court found that his net income for the purpose of child support was $3,637 per month. David graduated from high school but never finished college. In 1973, David became a licensed insurance sales agent. He started Cutler as a proprietorship in 1988 and incorporated it in 1994. From 1988 to 2000, Cutler sold exclusively Geico insurance under an agency contract with Geico. Geico's principal product is automobile liability and comprehensive coverage. This agreement prohibited David from representing any other company without Geico's written permission. In the trade, this business relationship is known as a captive agency because of the agency's exclusive arrangement with a single carrier. The contract also contained a one-year non-competition clause prohibiting David from soliciting former Geico clients in the event of a termination of the agency contract.
David testified that he was familiar with the agreement and understood the way it worked. He added that he had discussed aspects of the agreement with a number of other Geico insurance agents throughout the country. In these discussions he learned that because of the contract terms these agencies were not marketable. He identified several agents who closed their agencies for various reasons, and none of them received funds as a result of the termination.
David also explained that under the agreement with Geico he did not own his renewals in the agency, which meant that if he left, retired, or terminated the agency for some other reason, he would not receive any commissions for ongoing business from his customers. In contrast, an agent with an independent agency would expect to own his renewals when he left.
Charles Tzinberg testified for Susan on the issue of valuation. He received a bachelor's degree from the University of Denver and has been a certified public accountant since 1988. He works for a small accounting firm and spends most of his time doing accounting work that does not involve business valuations. He admitted that there are rigorous programs where an accountant can get certifications in business valuation but that he had not taken any of those courses or obtained any of those certifications. Tzinberg testified that under the "market approach" of valuation the agency had a value of $270,000.
Tzinberg did not provide an opinion of what the fair market value of the agency would be. He also did not analyze the agreement David had with Geico, explaining that he was not qualified to determine whether the contract foreclosed the possibility of the sale of the agency. While Tzinberg agreed that Cutler is a captive agency, restricted from selling other insurance products, he determined that the agreement itself was not material to the valuation of the business.
In establishing a market value in this case, Tzinberg used a multiplier of gross revenues as a rule of thumb. After researching a variety of sources for what he considered to be comparative sales of insurance agencies, Tzinberg found multiples ranging between 1 and 1.7. He decided to apply 1.3 times gross revenues to make a conservative estimate of the value. Tzinberg admitted that this rule of thumb was based on multiline agencies, which Cutler was not. Further, one source that Tzinberg relied on specifically indicated that the business valuation should weigh the risk of losing a carrier contract with whether there was a good mix of national, regional, and specialty-line carriers, allowing no more than 25 to 30% of a "book of business" to be with any one carrier. Tzinberg admitted that he did not factor these considerations into the valuation. He also admitted that the fact that the agency did not own its own renewals would be relevant if the business were being sold to an outside third-party buyer.
Frank J. Reedy, Jr., David's valuation expert, was then called to testify at the trial. He is both a certified public accountant and a certified valuation analyst. He spends about two-thirds of his time doing business valuations and damage measurements in legal situations and has been doing this work for more than 10 years. Additionally, he attends 40 to 60 hours of classroom instruction each year in the areas of business valuation, general accounting, and tax matters on both a local basis and a national basis. As a certified valuation analyst, he can provide business valuations for small, closely held businesses and professional practices. In order to achieve that designation, Reedy attended courses and training and passed a 48-hour examination. Reedy explained that he had performed between 100 and 200 business valuations, approximately two to four per month.
Reedy indicated that there were three commonly accepted methods used to value a closely held business such as Cutler: (1) the market approach, (2) the income approach, and (3) the "asset approach." Reedy explained that he had used detailed financial information in forming his opinion and had specifically reviewed the agreement between David and Geico because of the restrictions it imposed upon the business. After considering all three methods, Reedy concluded that the asset approach was the appropriate method for this situation. Under this method, the value of the agency was ...